Sabre Holdings Q2 2006 Earnings Conference Call Transcript (TSG)

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Sabre Holdings Corporation (TSG-OLD)

Q2 2006 Earnings Conference Call

August 3, 2006 5:00 pm ET

Executives

Sam Gilliland - Chairman of the Board, President, Chief Executive Officer

Jeffery M. Jackson - Chief Financial Officer, Executive Vice President, Treasurer

Thomas Klein - Group President of the Sabre Travel Network and Sabre Airline Solutions; Executive Vice President of Sabre Inc .

Michelle A. Peluso - President and Chief Executive Officer of Travelocity.com Inc, Executive Vice President, Sabre Inc.

Karen Fugate - Vice President, Investor Relations

Analysts

Paul Keung - CIBC World Markets

Brian Egger - BMO Capital Markets

Kunal Madhukar - Bear, Stearns & Co.

Jake Fuller - Thomas Weisel Partners

Michael Millman - Soleil Securities

Chris Gutek - Morgan Stanley

Scott Shiffman - Lehman Brothers

Michael Dimler - UBS

Justin Post - Merrill Lynch

Scott Devitt - Stifel Nicolaus

Operator

Good afternoon, and welcome to Sabre Holdings Corporation’s conference call to discuss 2006 second quarter results. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time.

(Operator Instructions)

As a reminder, this conference is being recorded on August 3, 2006, and is being broadcast live over the Internet.

I will now turn the call over to Karen Fugate, Vice President of Investor Relations for Sabre Holdings. Please go ahead.

Karen Fugate

Hello, everyone. Thank you for joining us today at our new time. I am hear with Sam Gilliland, our CEO; Jeff Jackson, our Chief Financial Officer; Tom Klein, President of Travel Network and Airline Solutions Businesses; and Michelle Peluso, CEO of Travelocity.

Before we get started, I would like to remind all of you that some of our comments on matters such as our forecasted revenue, earnings, transactions, operating margins and cash flow, contracts or business and trend information, would constitute forward-looking statements. These matters are subject to a number of factors that could cause actual results to differ materially from our expectations.

Those factors are described in the Risk Factors section for the company’s most recent Form 10-K filing with the SEC. The company undertakes no obligation to publicly update or revise any forward-looking statements.

We have provided a detailed explanation and reconciliations of our adjusting items and non-GAAP financial measures in our earnings press release and on our website.

Now I would like to turn the call over to Sam.

Sam Gilliland

Thank you for joining us. Today I will give you a summary of overall company performance for the quarter, and our plans, and I have asked Tom and Michelle to brief you on a couple of major highlights in their business units. Jeff is here, as usual, and we will dig into the numbers for you.

Of course, all of us are here for Q&A after the overview.

So let’s dive in. We had a very good second quarter, both financially and operationally. On an adjusted basis, we saw strong growth on both the top- and bottom-lines, and we achieved excellent overall earnings, positioning us to reach our 2006 goals.

In addition, our free cash flow was particularly good, so we are on track to exceed $300 million in free cash flow for the year.

Travelocity’s impressive financial results, along with first-rate cost discipline across the businesses, drove total company profitability in the quarter.

If we take a close look at Travelocity, we find that the business operated very well and significantly improved margins over the last year. With solid performance around the world, we are pleased with how the quarter ended. We did see some revenue softness in North America, while Europe turned in solid overall results.

To discuss more about these two regions, I will turn it over to Michelle.

Michelle A. Peluso

Thanks, Sam. Turning first to North America, in short, we were very pleased with our overall performance. We are making good on our commitment to consistently improve operating margins, despite the softness we saw in packaging revenue and the lower yield we anticipated in air.

Over the quarter, we saw softness in both total trip and site59, our last-minute packaging business. Given reduced capacity, record-high load factors, and prices up roughly 10% across the air industry, carriers have had less inventory available for discounting and hence, it provided less bulk fares to round out demand.

This is generally a seasonal phenomenon, which affects all players in the packaging business, and encouragingly, we are starting to see this rebound as carriers have begun to add bulk fares back in as we approach the fall, and as low-cost carriers have stepped in to fill demand.

Even though the packaging environment dampened our revenue growth, we made tremendous progress on the bottom-line. First, our operational focus on areas such as credit card fraud and customer service led to significantly lower costs that we expect to continue throughout the year.

Also, we continue to spend our marketing dollars thoughtfully, focusing on ROI, even while our competitors increase spend earlier this year, in some cases dramatically.

Finally, while our portal partners declined sizably year over year, our new contracts protect us from this and we receive the benefit from a cost perspective.

So, big picture in North America, it was a strong quarter, despite a more challenging environment for packaging.

Moving to our European operation, our performance was encouraging. Overall, the business was just shy of break-even, a significant improvement over the first quarter. We continue to focus on three key areas. First, our primary goal is to run the business well and hit our growth in operating income goals, particularly for the key online assets that we acquired.

Over the second quarter, on a pro forma basis, we saw overall gross sales grow single-digits on a local currency basis, though lastminute.com brand growing north of 20%.

Additionally, we put focus on cost control and marketing effectiveness, and were beginning to see they pay-off from these efforts. For instance, our revenue per dollar of marketing spend increased by 20% over the prior year. Secondly, we continue to simplify our business across Europe. During the quarter, we exited several non-core businesses, including our offline retail travel stores in France and the U.K., and our offline wholesale tour operating business in France.

Lastly, we continue to realize synergies from our acquisition, and in the second quarter, we began to flow the first bookings through Sabre, significantly ahead of our schedule. We also launched the North America point of sale for our unique Holiday Autos car rental business.

To wrap up, overall, it was a strong quarter from a bottom-line perspective, and with the exception of the packaging business in North America, the core metrics look healthy.

With that, I will turn it back to Sam.

Sam Gilliland

Thanks, Michelle. Travelocity continues to differentiate itself and its products from the competition. Although some competitors announced similar customer service initiatives, our customer championship program remains the foremost guarantee in the industry.

Travelocity also made great strides behind the scenes. As Michelle mentioned, her team’s execution of ongoing fraud prevention issues have seen impressive results, the most notable being that the air fraud rate is now half of last year’s average.

On the corporate solutions front, Travelocity Business added Lockheed Martin to its customer list. Lockheed is one of the single largest travel [inaudible] in the country and by far, our biggest win to date.

At Get There, we signed several major accounts and added six new distributors. Get There also added online dining reservations and activities and moved the majority of its interface to the Travelocity look and feel.

Zuji, which has consistently performed well every month since we acquired it, continues to grow in Asia-Pacific, and is slated to launch in India later this year under the Travelocity brand.

Now, let’s shift our attention to Sabre Travel Network, which continued to show solid operating performance in the quarter, and generated strong cash flow, and perhaps most important is the increase and margin.

We are maintaining the core strength of our efficient marketplace, which is highly valued by suppliers, travel agents, even corporations alike, and we continued to take advantage of our scale, effectively managing costs, thereby lowering our cost per transaction.

We continued to gain momentum in the second quarter by completing multiple content distribution deals, and I have asked Tom to share more insight on those deals, as well as other topics within Travel Network. Tom.

Thomas Klein

Thanks, Sam. Our Sabre Travel Network business had a strong quarter operationally. We continued to use the strength of our portfolio, and our skill, to fortify and improve the business, and to meet our objective to be the ultimate one-stop shop for travel agents and the most effective market place for suppliers.

There are a couple of areas I would like to call out, in particular.

As I mentioned on our last call, we signed long-term, full content distribution agreements with Delta Airlines and United Airlines in April, and in May, we signed a similar agreement with Continental Airlines.

I am very pleased to say we just recently signed a long-term full content agreement with Alaska Airlines.

Content is paramount for corporations and travel agents. Clearly they need assurance that they will have long-term access to airlines’ full content to service their customers efficiently, which is what our Efficient Access Solution is all about.

In fact, we now have more than 280 carriers around the world signed up for full content agreements, which speaks volumes of the value we continue to provide carriers.

Travel agencies have continued to recognize the value of Sabre, which is reflected in the growing number of transactions. We are particularly pleased in the growth in our online segment. During the second quarter, we began to see bookings from lastminute.com and Site59 flow through the Sabre system.

In the past two weeks, bookings from Expedia and Priceline began to flow through Sabre as well.

Adding volume of this magnitude is not inconsequential, and our technology team has done an outstanding job managing the increase.

The high volume of transactions from online agencies adds further to our scale, and as we continue to manage our costs, contribute to the low-cost per transaction that Sam mentioned.

Those are the two areas I am particularly excited about this past quarter. The growing number of carriers with full content in the Sabre system, and the volume of bookings flowing from online agencies.

With that, I will turn it back over to you, Sam.

Sam Gilliland

Thanks, Tom. Clearly there was an abundance of great work done at Travel Network in the quarter, not only to reach agreements with major airlines in the U.S. and elsewhere, but also to tackle the very hard cost issues that stem from those new agreements.

We believe that equilibrium is emerging. We have long-term full content agreements with five of the six major network carriers in the U.S., and our Efficient Access Solution, that takes effect next month, will ensure full content for travel agents, address the airlines’ cost objectives, provide further value to corporate agencies, and help avoid fragmentation in the industry.

It has already gained support from a number of leading airlines, and some of the largest travel agencies, both offline and online. We are pleased with this momentum.

Moving to hotels, our hotel business continued to grow at a steady pace, accounting for 10% of Travel Network’s quarterly revenue. The Sabre GDS now handles distribution for 72,000 properties and counting.

To Nexus, which now serves more than 8100 properties worldwide, opened a new reservations call centre at our headquarters in Southlake, Texas, and recently introduced its new and improved central reservation system.

So our continued progress with Travel Network and throughout the company demonstrates that the team continues to reign in costs, build scale, provide better service, and increase productivity. This is what allows us to maintain strong free cash flow and adjust our business model to respond to the changing needs of the marketplace.

One of the best examples of how our business model is changing comes from airline solutions, where we are shifting away from one-time revenue generated by up-front licensing fees to a more predictable model, characterized by reliable, recurring revenue streams that allow for better comparisons on a quarterly basis, and for stronger revenue growth over the long-term.

One carrier that adopted the newer model is fast-growing Indian carrier King Fisher, who recently chose us to install more products and technology in addition to those they already use. Just last week, they went live with our Sabre Sonic reservation system, making their technology infrastructure almost entirely Sabre-based.

So overall, airline solutions had a solid second quarter and that, combined with a solid first quarter, and a strong sales pipeline, leaves us confident that we will reach our year-end goals.

Now, for more on the numbers for this quarter, and the overall outlook for the year, I will turn the call over to Jeff.

Jeffery M. Jackson

Thank you, Sam. This afternoon, I will cover our second quarter results for total company and each business unit, and then turn to outlook for third and fourth quarter.

Our total company second quarter results were strong, with double-digit growth in revenue and earnings, and robust cash flow. Total company revenue was $723 million, 17% higher than last year, primarily attributed to growth at Travelocity.

Total company operating income on an adjusted basis was $105 million, healthy year-over-year growth of 17%, and margin of 15%.

GAAP operating income was $78 million, with an 11% margin. Earnings per share on an adjusted basis grew 9% to reach $0.45, and GAAP earnings per share were $0.26, which includes the loss we took from the sale of non-core European assets at Travelocity.

Both our adjusted and our GAAP results include a positive impact of several million dollars, or a few pennies of EPS, due to a reversal of a federal tax accrual. Even without this reversal, adjusted earnings per share were at the higher end of our project range.

Total company cash flow grew significantly over last year to reach $155 million, an increase of over $60 million, or growth of 66%.

Cash flow from operating activities grew 53% to $179 million. This increase is due primarily to strong execution across the portfolio, and the addition of lastminute.com.

At quarter-end, cash and marketable securities stood at $466 million, debt at $1.1 billion, and net debt of $658 million.

On a trailing 12-month basis, our debt to adjusted EBITDA ratio is 2.8, and by year-end, we expect that ratio to drop to around 2. We believe this is a comfortable level for debt to adjusted EBITDA, considering the amount of annual free cash flow we generate across our businesses.

Turning to business unit results, I will cover key highlights and metrics for each business. All reported financial and operating metrics are provided in the earnings release and reconciliation schedules.

I will start with Travelocity.

Global Travelocity had another impressive quarter, with strong revenue growth and margin expansion. Global gross travel booked for the quarter totaled $2.7 billion, strong growth of 58%. Europe gross travel booked was $689 million, and North America, which includes Zuji, was $2 billion, healthy growth of 22%.

Travelocity’s global revenue totaled $281 million, growth of 63%. Europe revenue was $183 million, and revenue from North America grew 8% to $178 million.

Total global transaction revenue 68%, driven by 86% growth in non-air transaction revenue.

Despite some revenue softness in North America, Travelocity significantly improved adjusted operating income to reach $23 million, a margin of 8%. This represents a year-over-year margin pick-up of over 4 points.

Operating income on a GAAP basis was $6 million, for a margin of 2%.

North America, inclusive of our Asian business, Zuji, had adjusted operating income of $24 million, 33% growth over last year, and a strong margin of 14%.

On a GAAP basis, operating income of $20 million, with an 11% margin.

Europe had an operating loss of $1.5 million on an adjusted basis, and $14 million on a GAAP basis.

Travelocity’s total adjusted EBITDA nearly tripled to reach $31 million. North America with $29 million, an EBITDA margin of 16%, and adjusted EBITDA for Europe turned positive at $2 million.

Our operation integration activities at lastminute.com are on target, and we continue to make steady progress on Sarbanes Oxley compliance, although we still have work to do. To ensure we meet future compliance deadlines, and bring world class financial systems to lastminute.com, we have increased our financial system integration spend for the back-half of the year by $5 million to $6 million.

Now turning to Travel Network.

Revenue for the quarter was $420 million, a year-over-year decline of 2%, with total transaction growth of 1%, both in line with our expectations.

As we have said before, our mix of transactions continues to evolve. These lower rate transactions dampen our revenue growth, but have minimal impact to earnings due to associated cost-savings.

In Hotels, we grew revenue 16%, driven by organic growth, marketing programs, and SynXis transaction growth.

Travel Network had strong operating income for the quarter of $73 million on an adjusted basis, and strong margin of 17%. On a GAAP basis, operating income was $65 million, with a margin of 15%.

Adjusted EBITDA was $86 million, 5% growth over last year, with an EBITDA margin of 20%.

We continue to operate this business efficiently, taking out costs and lowering the cost per transaction.

In particular, we are very encouraged with the progress we are making to reduce data processing and overhead costs. Our long-term goal remains the same in Travel Network, to maintain mid-teen margins and stable cash flow, and thus we are pleased with the margin of 17% for the quarter.

The Airline Solution business had a solid quarter, with revenue of $68 million, growth of 1%. Adjusted operating income was $10 million, for a 15% operating margin, and GAAP operating income was $8 million, a margin of 12%.

Adjusted EBITDA was $15 million, for a margin of 22%.

I was pleased with the overall financial performance this quarter. All of our businesses met their earnings and cash flow objectives during a challenging time in our industry. Strong, mid-teen margins in Travel Networks and Airline Solutions, margin expansion in Travelocity, and strong cash flow across all of the business is the model for financial success at Sabre Holdings for the next several years.

Now, turning to outlook.

We remain confident in our adjusted full-year projections for Sabre Holdings, which includes our assumptions on Expedia and Priceline transactions, as well as opt-in dynamics in the marketplace.

To reiterate, our adjusted total company full-year outlook is revenue approaching $3 billion; adjusted earnings per share greater than $1.70; adjusted EBITDA of greater than $500 million; operating cash of greater than $425 million; and free cash flow greater than $300 million.

Our GAAP earnings per share is now expected to be greater than $1.12, down from our previous guidance, due to the loss we took in Q2 from the sale of our non-core European assets.

GAAP net income is projected to be over $147 million.

Now moving to guidance for the third and fourth quarters.

For the third quarter, we expect total company revenue to be in the range of $745 million to $775 million, with adjusted earnings per share in the range of $0.58 to $0.62, and GAAP EPS in the range of $0.44 to $0.48.

For the fourth quarter, we expect total company revenue to be in the range of $650 million to $680 million, with adjusted earnings per share of $0.42 to $0.46, and with GAAP EPS in the range of $0.29 to $0.33.

With that, I will turn it back to Sam.

Sam Gilliland

Thanks, Jeff. So for the first-half of the year, we are well-positioned for the second-half. Travelocity continues to grow as it differentiates itself from the competition. Travel Network and Airline Solutions are operating effectively and significantly contributing to our free cash flow.

As we move further into the second half of the year, we remain on strategy and are on course to meet our 2006 forecasts across the businesses.

With that, let’s go to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions)

We do have a question from the line of Paul Keung form CIBC World Markets. Please go ahead.

Paul Keung - CIBC World Markets

Good afternoon, everyone. This is [Maresh] for Paul Keung. Thanks for taking our questions. My first question has to do with your long-term strategy of returning capital to shareholders. Sam, you are operationally on track to have solid full-year visibility in GDS economics, which is a major improvement compared to past years. It looks like Travelocity and Lastminute are showing improving cash flows.

But your stock has done nothing for quite some time. How do you feel about spin-offs, major share buybacks, or dividends over the next 12 months? Do you think this is the time to do it, or at least give it some serious consideration? I have a follow-up question after this question.

Sam Gilliland

Let me start by saying we do feel very good about our current cash position, and future cash flows. We do feel like we are getting to a place of predictability, sustainability, and then growth in those cash flows.

We look at a lot of different options in terms of our capital deployment to increase shareholder value. As you might imagine, we look at things like stock buybacks, dividends, capital projects obviously that support organic growth, and acquisitions.

I suppose we could go down any one of those paths. I imagine that you will see us primarily focused on things like stock buyback, dividends, paying down debt, probably as areas where we are more focused on than others.

As an example, we do not -- we have a lot on our plate already in terms of the acquisitions that we have done over the last year or so. So we do not have any plans for significant acquisition activity.

Really, we do want to, with our cash flows, drive value for shareholders, and we think we can do that through things like our dividends, which we increased again this year, things like share buyback, and buying down our debt.

Jeff, anything that…

Jeffery M. Jackson

The only other thing I would say, maybe as an emphasis, Sam, is that as I said in my remarks, as we see the year progressing, with the sort of debt-to-EBITDA ratio that we project by the end of the year, that is a very comfortable level, ratio level, so I do not expect that we will be needing to tinker with that much beyond the end of the year.

Paul Keung - CIBC World Markets

My second question is about Jet Blue. On Jet Blue’s second quarter conference call, management had mentioned ongoing discussions with various partners, and it looks like an announcement is coming. I was wondering if you could tell us if you are speaking with Jet Blue and how important is this deal from a competitive standpoint.

Sam Gilliland

I cannot comment on this a whole lot. We have not made a formal announcement. We expect Jet Blue to be in Sabre very soon. I would just say stay tuned for an announcement that will be forthcoming shortly.

Operator

Thank you. Our next question is from the line of Brian Egger from BMO Capital Markets. Please go ahead.

Brian Egger - BMO Capital Markets

Thank you, good afternoon. I just wanted to ask a little bit more about your BDS revenue growth, it was a little lighter than we might have expected in the context of your revenue performance. I know you mentioned a decline in some lower-rated transactions, but if you could provide maybe a little bit more color, maybe on revenue per booking trends and other non-direct revenues in the quarter.

Sam Gilliland

Let me just dig in on that. In the second quarter, our growth rate in transactions was relatively flat, just about 1% year over year. There was some anniversary effect in there for Easter. Easter occurred in April this year, whereas last year it was in March, so that had some impact.

While transaction volumes grew, the revenue per transaction declined slightly and that is due to a mix of agreements we have in place with travel agents and obviously new long-term agreements with the airlines.

Operator

Our next question is from the line of Robert Peck with Bear, Stearns. Please go ahead.

Kunal Madhukar - Bear, Stearns & Co.

Hi, this is Kunal for Bob. A couple of quick questions on the GDS and the feedback that you are getting from the ES. When should we expect to see some kind of details on travel agency feedback on the ES, and some economics?

Sam Gilliland

I will jump in here, and then Tom, maybe you can provide some more color here.

We have, as you might expect, and we were really first in the industry to announce this type of program. We have seen some of the other programs -- well, we have seen other programs announced since then, both by airlines and the GDS competitors.

As you may be aware, we had originally set the time line for implementing the program at August 1, and in fact, because others announced their programs later, with later effective dates, we decided that we wanted to give travel agents the full benefit of looking at all their options before making their decisions, and therefore we set our timeframe of September 1st to implement the program.

We have had actually, considering the fact that this is a hard thing for travel agencies, because the program, while it involves a lot of new product capabilities, it also involves a change in economics. We have actually gotten good feedback on the mix of both capabilities and functions and content that we are providing, along with these economics.

You look at various segments of our customer base and you see that, and actually just to talk a little bit of the mechanics of it, a lot of our customers are auto-enrolled in this program, so over 5,000 customers already auto-enrolled with an effective date of September 1. These customers have the ability to opt out, but to date, there have been very few that have chosen to do that.

I think we are making good progress here in the part of the market that is really the small to mid-sized agencies. We are also having very productive discussions with larger agencies. We have endorsements in terms of our overall approach, and you may have seen these from American Express and from Expedia, and I expect more will follow.

So overall, I think it is going reasonably well, again considering the fact that this does represent an economic change in the relationship.

I do not know. Tom, anything else that you would add?

Thomas Klein

Only that you mentioned Expedia and American Express, the largest business travel agency and the largest leisure, so we were pleased with those endorsements.

The Hogg Robinson deal that went into effect that we announced earlier this week is a very large -- I believe the second-largest European business travel entity, and they also have a presence here in the U.S.

Then we mentioned the Priceline bookings start to flow, and it is right in the middle of these discussion. I think just the fact that the Priceline is also moving business along is helpful.

In all segments of the market, we have some level of endorsement. As Sam said, we are not pushing people to sign up before September 1. That is when they will make their decision, and all indications are that the large majority of our customers will be on board with the program.

Kunal Madhukar - Bear, Stearns & Co.

Moving to Travelocity and potentially looking at another market out there in Asia, that is probably maybe bigger than India, and that is China. Any plans to go in there, either starting from scratch or maybe acquiring something?

Michelle A. Peluso

Sure, Kunal. We are looking at China very closely, as you would expect. India for us represents we think [inaudible] an opportunity for a variety of reasons. First of all, we have operations there already. We have a call center and technology developers there.

Secondly, from a language and a product capability perspective, we feel pretty confident we have the right product.

So it feels like a [near-in] opportunity, but as you expect, we are looking carefully and thoughtfully at other countries, like China.

Kunal Madhukar - Bear, Stearns & Co.

Thank you.

Operator

Thank you. Our next question is from the line of Jake Fuller from Thomas Weisel. Please go ahead.

Jake Fuller - Thomas Weisel Partners

A question for you on the guidance side of the equation. It looks to me like the implied back-half revenue and EBITDA guidance is down versus your prior expectations. What has changed to lead your expectations down?

Sam Gilliland

I am kind of looking around the room. My impression is we did not move any of that down.

Jake Fuller - Thomas Weisel Partners

If I read the release correctly, it looks as though your full-year EBITDA guidance went from 526 to 541, down to 500 to 513 at the high-end.

Sam Gilliland

Our guidance is -- maybe we should get on the phone with you afterwards, but it is greater than $500 million on an EBITDA basis. Again, I do not -- I am looking around the room, but I do not think that has changed all year.

Jake Fuller - Thomas Weisel Partners

Okay, I would be happy to talk about it after, but it looks as though there is a table in the back of the release that provides a range, and that range is different than the range provided in the prior release from the first quarter. So assuming EBITDA this quarter was in line or ahead, I am assuming that the downward reduction in that full-year guidance would have to be coming out of the back-half.

Sam Gilliland

Again, we will have to get on the phone with you afterwards, because that is not my impression.

Jake Fuller - Thomas Weisel Partners

If you looked at European online travel bookings, what was the pro forma trend?

Michelle A. Peluso

There was, in terms of gross bookings on a pro forma local currency basis, it was a little bit softer than the first quarter, so single-digits as opposed to the 10% in the first quarter total, and then lastminute.com grew at about 30% in the first quarter, and over 20% this quarter.

Part of that is just the World Cup phenomenon, so there is a bit of a softer period in the second quarter from the World Cup, but overall, some pretty strong trends.

Jake Fuller - Thomas Weisel Partners

And the U.S. pro forma growth rate if you backed out Zuji?

Michelle A. Peluso

We do not break those out, but as you know, Zuji is a very small part of our business.

Operator

(Operator Instructions)

Our next question is from the line of Michael Millman, from Soleil Securities. Please go ahead.

Michael Millman - Soleil Securities

Thank you for taking the call. I have several questions. First, I wanted to back up to the last question. It looks like EBITDA is down $25 million compared with what you projected in the first quarter. In any event, on Travelocity, could you talk about how much marketing declined in the second quarter?

Michelle A. Peluso

Michael, we do not give our specific marketing numbers for competitive reasons, but we have been very thoughtful and focused on our ROI, so we continue to grow revenue at a faster pace in North America than we are growing marketing spend.

Michael Millman - Soleil Securities

Is it fair to assume that marketing was down?

Michelle A. Peluso

No, I would not say down year over year necessarily, but absolutely the case that we are growing marketing spend at a slower pace than we are growing revenue in North America.

Michael Millman - Soleil Securities

Also, for the full year, is there a slight change? Previously I thought that full-year guidance excluded Expedia and Priceline, and now it seems to include it. Is that correct?

Sam Gilliland

No, we have always said there was going to be a pool of travel agent bookings in the back-half of the year that we expected to come online, and Expedia and Priceline were built into that plan for the back-half of the year. So there is no change.

Michael Millman - Soleil Securities

Is it fair to assume that, when everything shakes out, that the incentives for that will be given to Travelocity will be the same as Expedia and Priceline?

Sam Gilliland

Jeff, you can comment on this too. We have a very disciplined approach, in essence setting a market rate for the incentive that is transferred between Travel Network and Travelocity, so Jeff runs that process and we look at market data to determine what is an appropriate market rate incentive. That is the way it works, and we evaluate that from time to time based on what we are seeing in the market place.

Michelle A. Peluso

As we mentioned on the first quarter call, that is in Travelocity’s projections, and in some cases is already in our actual numbers.

Michael Millman - Soleil Securities

Maybe just a little bit more on that, if Expedia is getting a better deal, is that what you mean by market rate?

Sam Gilliland

What we mean by market rate is we look at a large number of market indicators, meaning incentives with customers that we see out in the marketplace, or that we are aware of that maybe even other GDS’ have either with online players or other players, so we look at a lot of different market indicators, and that helps us determine what we should be transferring between Travel Network and Travelocity.

Michael Millman - Soleil Securities

On Travel Network, on the growth, what was that on an organic basis?

Sam Gilliland

Organic basis… I do not know.

Jeffery M. Jackson

I am not sure I understand. There were no -- do you mean acquisitions? There were no acquisitions.

Michael Millman - Soleil Securities

Maybe excluding -- you said you added Lastminute, for example, and I think you said there was something, someone else…

Jeffery M. Jackson

Yes, there were bookings that began to flow from Lastminute.

(Multiple Speakers)

Thomas Klein

We do not provide account by account builds on our growth rates. We build in gross bookings over the course of the year. The timing is not precise when we do our plan, obviously, but we are right on track for what our bookings growth plan for the full year is, based on not just the online booking growth, but some reasonable growth from our brick and mortar segment as well.

We do not break it out on account by account basis.

Michael Millman - Soleil Securities

It was more just trying to get an idea of what the underlying strength is in the business.

Thomas Klein

We felt like we had a pretty strong quarter, 17% operating margins and reasonable booking growth, and booking growth is strong through the year, through the back-half of the year because a lot of the online business is coming on now.

Sam Gilliland

Michael, we had about a one point improvement in margin year over year, and as you have been watching us over the last three or four quarters, that is actually a good, nice up-tick versus what we were seeing in some of the other quarters, so I think from an expense perspective, in particular, the team is managing the business really well. We are obviously pleased to have new business coming online, and again, whether it is online players and online customers that are internal, like lastminute.com and Site59, or now in this quarter, in the current quarter, online customers Priceline and Expedia.

Michael Millman - Soleil Securities

Thank you.

Operator

We now have a question from the line of Chris Gutek from Morgan Stanley. Please go ahead.

Chris Gutek - Morgan Stanley

Thank you. Just a couple of follow-up questions, maybe starting with follow-ups on the Efficient Access Solution. I know it may be a little bit early to answer this fully, but given how much traction you are getting, or expect to get from the travel agency community, I am curious what you expect the margin impact to be on the Sabre Travel Network business, just in rough terms.

Sam Gilliland

At this point, we are not going to get into a lot of detail on that. You know, we have gotten questions along the lines of is this going to be, is the Efficient Access program going to be neutral, is it going to drive us to neutral in terms of this overall program and the deals we have done with Airline.

The EAS program itself is really only one component of a broad set of cost initiatives, as I think we have said a number of times in the past. We have a lot of work underway to improve our cost structure, and the combination of the EAS program, those cost initiatives, to what is required to allow us to price our products at levels that are attractive, in this case, with suppliers and allow us to meet the short- and long-term financial goals.

Now, again, I would just reiterate that our plan is to maintain mid-teens margins in the travel network business.

Chris Gutek - Morgan Stanley

Let me try a similar question for Michelle, if I could, which is presuming that a meaningful percentage of the Travelocity revenue comes from incentives, and presumably that is a very high margin revenue stream, assuming that Travelocity has fully adopted Efficient Access Solution on market terms, the same question -- can you say just roughly, maybe qualitatively, what the impact on Travelocity’s margins would be?

Michelle A. Peluso

First of all, in the second quarter, incentives were 16% of Travelocity’s overall revenue, so while it is a meaningful number, it is certainly a number that we can make good by other cost-efficiencies and other improvements in our operations, and that is fully what we intend to do, to continue to build our revenue streams by selling higher margin products, and then also obviously to have operational efficiency.

I think it is something -- the good news is it is something we have obviously been planning for for a while and been thoughtful about and thinking about for a while. We feel comfortable that for the portion of carriers that we will opt-in for, which is obviously the major carriers, not all European carriers, for instance, we have ways to offset that with operational improvements and expansion in revenue.

Chris Gutek - Morgan Stanley

A couple more quick ones. Sam, can you say what the hold-up is on a new deal with American?

Sam Gilliland

Well, I think both American and Sabre are just trying to be patient. No, I am kidding.

Look, we would like to get a new agreement with American. I think we are still pretty far apart on a number of terms. As you may be aware, we are now operating under the terms of what we call our participating carrier agreement. We call it the PCA. It has been in place for years.

Actually, PCA 3 was a modifier, an amendment to the PCA agreement, so we are operating under that agreement today. We would obviously like to get to a long-term agreement that provides American with better economics, you might even presume best economics, given their size and volume. Along with the best economics, we want to ensure that we have protections for customers that the other 14 airlines have clearly gotten comfortable with.

That is where we are. We clearly have work to do. We would like to get a new agreement with American, obviously.

Chris Gutek - Morgan Stanley

Sam, let me sneak in one more, if I could, while I am putting you on the hot seat here. In response or follow-up to the previous question about strategic actions, if you look at the multiples paid, or relative multiples paid for [Galileo] versus Orbitz and other online travel assets or travel ports, it would suggest that in a sale to private equity firms, that your company could fetch a price in the mid- to high-20’s, maybe a bit higher. I think in the past you talked somewhat explicitly about the frustration with the stock price performance.

Could you address specifically the management team’s and the Board’s current thought on a potential sale of the company?

Sam Gilliland

No, I could not comment on that. We obviously watched with interest the Travel Port sale, and beyond that, I would not comment on our evaluation now or in the future, obviously.

Operator

Thank you. Our next question is from the line of Scott Shiffman from Lehman Brothers. Please go ahead.

Scott Shiffman - Lehman Brothers

Thank you. I just wanted to follow-up on the earlier comments regarding your target gross leverage of about 2 times. I guess the question is, in particular to your direct GDS peers, why so low? Maybe if you could just expand upon your rationale of why 2 times?

Jeffery M. Jackson

We do not have a target ratio. That was more of a comment on where it is headed and the fact that we are comfortable at that level. I would simply say that several, in fact, almost all of our GDS competitors are going to be in a private, highly-leverage position, and it would be different.

The only other thing I would say is we are coming out of the lastminute.com acquisition, where we did add leverage. I think we have been very encouraged about how quickly we have been able to de-lever the company, so we are just a year away from that and are balancing the needs of all of our constituencies on the equity side and the debt side, and those are my thoughts on that.

Scott Shiffman - Lehman Brothers

Do you feel that you are at a financial disadvantage, relative to your peers, given the leverage constraints that your investment grade ratings imply?

Jeffery M. Jackson

I do not -- if where you are headed with that is, are we unable to make acquisitions, make investments that would drive growth and cash flow, I do not feel constrained in the least bit. Period. We have always enjoyed good access to capital in the debt and equity markets. I do not feel any differently about that today, and I certainly do not feel disadvantaged competitively.

Operator

Thank you. Our next question is from the line of Michael Dimler with UBS. Please go ahead.

Michael Dimler - UBS

Thank you. This is a follow-up to the AMR question. Is there any color you can give around which issues seem to be the most contentious, in general terms?

Sam Gilliland

I could, but I will not. We really prefer to keep these negotiations confidential, and out of the public, so that is what we will continue to do.

Michael Dimler - UBS

As far as Travelocity, you had said you expected to get to a 10% run-rate operating margin. I believe you said this year. Do you still expect that for this year, or is that more of an ’07?

Michelle A. Peluso

Our guidance was to approach 10% this year and clearly we are pleased with our first quarter and second quarter performance.

Michael Dimler - UBS

So you are looking at first quarter and second quarter as representative of what you continue to produce on an average basis?

Michelle A. Peluso

That is right. As you know, obviously our business is seasonal, particularly in Europe where the profits to be generated are really in the third quarter. North America is less seasonal, but to see us hit, for instance, in North America, even with the investments in Zuji, a 14% margin is encouraging.

Operator

Thank you. Our next question is from the line of Justin Post from Merrill Lynch. Please go ahead.

Justin Post - Merrill Lynch

I wanted to follow-up on the Travelocity margins. I think back in December you gave some guidance for ’07, where you thought they could get up to a certain number. Can you refresh on that and whether you still think that is possible?

Michelle A. Peluso

Broadly, we said that we would continue to expand our margins significantly in ’07, and we certainly feel very comfortable with that. I do not think we have gotten into, or we have not recently gotten into very specifics, but if I remember back from the call, we talked about operating income margins approaching 15%.

We will clearly refresh all those numbers as we get closer into next year, but clearly the progress we are making this year and hitting the numbers this year goes a long way in making sure we continue to expand our margins in out years.

Sam Gilliland

You just have to like that even in a quarter where we did have a bit of a slower growth rate domestically than in past quarters, when we have been on a really nice string, the scale of the business is at a place, and the operating efficiencies are at a place where we had 4 points of margin expansion. You got to love that, and you have to believe as I do that that can continue.

Justin Post - Merrill Lynch

I do not know if you covered this, but just on the incentive feed changes inter-company. I think you have commented on it a bit a couple of times. What effect do you think that will have on margins in next year? Can you comment at all on that?

Michelle A. Peluso

On the Travelocity side, just to reiterate what I said earlier on the incentive from Efficient Access, the incentive opt-in is baked into our guidance and in some cases, actually in our actual results.

Operator

Thank you. Our next question is from the line of Scott Devitt from Stifel Nicolaus. Please go ahead.

Scott Devitt - Stifel Nicolaus

Thank you. Most of the questions have been answered, I just have two for Michelle. Michelle, I think you noted some softness in Europe related to the World Cup. I was wondering if you could elaborate on that, and if specifically it is related to air travel or inclusive of hotels as well.

Michelle A. Peluso

There always seems to be a bit of softness in bookings, particularly in the month of the World Cup, and of course, the World Cup was in June of this year, so we did see a bit of a slowdown in all of the countries across Europe, broadly across most of travel, but that has rebounded now as we have gone back into July.

We did have a nice, solid quarter across the board in dynamic packaging in hotels, much like we did in the first quarter, but again, there was a little bit of a step-down in the gross travel booked rate between the first quarter and second quarter owing to the World Cup.

Scott Devitt - Stifel Nicolaus

Finally, you noted 16% of Travelocity revenue from incentives. Do you know what that is in terms of percentage of EBITDA?

Michelle A. Peluso

No, I do not have that number, but again, it is mid-teens in terms of the incentives that are in Travelocity’s North America revenue.

Scott Devitt - Stifel Nicolaus

Thank you.

Jeffery M. Jackson

This may be the appropriate time for me to clarify some of those EBITDA questions that were made at the outset of the question-and-answer period.

A couple of key points, one is, as I said, our overall position on EBITDA, company-wide, has not changed. It is still greater than $500 million.

Second thing is, and I think some of these questions were coming from looking at the reconciliation tables associated with the press release, if you go to the business unit EBITDA ranges, they also remain unchanged, which is where that stuff comes from. What we did do is tighten up the TSG EBITDA range to add, to reconcile better with the business unit ranges.

As we talked about on the call, there were a number of things that were going on below the EBITDA line. Our taxes, we had a benefit from taxes, the accrual being released. That is below the EBITDA line. We had stuff going on in the D&A line as well.

Fundamentally, the EBITDA ranges for each of the business units has not changed, nor has our guidance overall. There was a mechanical, if you will, tightening up going on in the reconciliation tables to tie to the [B] results.

Operator

Thank you. Our final question today comes from the line of Chris Gutek from Morgan Stanley. Please go ahead.

Chris Gutek - Morgan Stanley

Just a couple quick follow-ups, maybe Jeff, starting there. The loss on the sale of the European business, could you confirm that was not previously in your GAAP guidance? Could you also elaborate on what that was? Was that an underperforming piece of Lastminute, or the old Travelocity Europe that was divested?

Jeffery M. Jackson

Michelle will grab the second one, but you are right, Chris, it was not in our guidance.

Michelle A. Peluso

The businesses that we exited were really offline businesses that we felt were complex for us to operate and not part of our focus on the core consumer growth businesses, so they were some offline wholesale and also stores that were particularly in France.

Chris Gutek - Morgan Stanley

Sam, one more. I think you guys have been intentionally vague in how much business you expect to get from Expedia and Priceline for the Travel Network business, but I thought I would try asking the quarter. Can you put some color around what the incremental benefit could be there for revenue?

Sam Gilliland

Probably the best thing to do is maybe ask the folks at Expedia and Priceline what their views are on that. We obviously have established good relationships with them. We expect them to be productive relationships. It does not make much sense for us to lay out any more specifics than that.

With that, we are done with our call for today. We really appreciate everybody’s participation. We look forward to talking with you next time. Thank you.

Operator

Thank you. Ladies and gentlemen, this conference will be available for a replay after 7:30 p.m. Central time today, through midnight, August 17th. You may access the replay service by dialing 1-800-475-6701, and entering access code 837275. International participants, please dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, using the access code 837275.

This does conclude our conference for today. Thank you for using AT&T Executive Teleconference. You may now disconnect.

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