The Sabre Group Q4 2005 Earnings Conference Call Transcript (TSG)

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The Sabre Group (TSG-OLD)

Q4 2005 Earnings Conference Call

February 2nd 2006, 10:00 AM.

Executives

Sam Gilliland, Chairman, President and Chief Executive Officer

Jeffery M. Jackson, Executive Vice President and Chief Financial Officer

Thomas Klein, President of Sabre Travel Network and Airline Solutions businesses

Michelle Peluso, Chief Executive Officer, Travelocity

Analysts

Jim Kissane, Bear Stearns

Jeff Kessler, Lehman Brothers

Justin Post, Merrill Lynch

Chris Gutek, Morgan Stanley

Michael Millman, Soleil Securities

Jake Fuller, Thomas Weisel

Scott Devitt, Stifel Nicolaus

Starting Abruptly

Thank you for joining us today. I’m here with Sam Gilliland, our CEO, Jeff Jackson, our Chief Financial Officer, Tom Klein, President of our Travel Network and Airline Solutions businesses, and Michelle Peluso, CEO, Travelocity. Sam will review highlights for the year, Jeff will review our financial results, Tom will discuss the Travel Network and Airline Solutions businesses, and Michelle will provide an update on Travelocity.

But before we get started, I would like to remind all of you that some of our comments on matters such as our forecasted revenues, 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 of the Company’s most recent Form 10-Q 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’ll turn the call over to Sam.

Sam Gilliland, Chairman, President and Chief Executive Officer

Good morning everyone, and thanks for joining us. I’ll kick things off with a few thoughts on 2005, and our latest quarter before I hand it off to the rest of the team. Let’s start with Airline Solutions where we celebrated the fifth quarter in a row of solid earnings growth with full year operating income growing by $25 million and margin increasing by 9 points. New contracts in the fourth quarter, contracts with Southwest, Japan Airlines, Kingfisher in India set the stage for continued strength at Airline Solutions. Even though the fourth quarter of 2004 was a turnaround quarter for the business, our fourth quarter of ‘05 still showed solid growth.

At Travel Network we rely less on air revenue to sustain our margins than we did a year ago and we continue our cost focus. Of course air is still our primary revenue generator, and as Tom will discuss in a few minutes, both airlines and travel agents continue to see Sabre Travel Network as a great marketplace for business. We also continue to find new and better ways to serve hotels through smarter merchandising across Travel Network and Travelocity and it’s helping our non-air business take off.

At Travelocity we continue our strong growth trajectory with operations in the fourth quarter yielding 28% revenue growth in North America. I know I am stealing some of Michelle’s thunder here, but I want to mention this was the eighth quarter in a row at Travelocity where the revenue growth rate was greater than 25%. There was also great execution. Our lastminute.com integration continue the pace. We saw advances in our Travelocity and lastminute.com brands, strong growth at Travelocity partner network, and a great start to the New Year.

Bottom line this past quarter and this past year, we met the goals we set for ourselves. We did what we said we would do and as we look ahead we continue to be bullish that the work we did in 2005 will pay off in 2006 and beyond. Finally, I want to mention that earlier this week we announced an increase to the quarterly cash dividend raising it from $0.09 to $0.10 a share. And we are pleased to continue to enhance shareholder returns in this way. Before we get into the business units for more detail I will turn it over to Jeff for the financials.

Jeffery M. Jackson, Executive Vice President and Chief Financial Officer

Thank you, Sam. This morning I will cover our results for total company and by business unit as well as reiterate our 2006 outlook. And I’ll start with our total company results for the quarter. Our fourth quarter performance was operationally strong, in every business unit and led the way to a great start for 2006. Our total Company revenue in the fourth quarter was 620 million, 25% greater than last year. Our growth was driven by all three business units, but principally by Travelocity.

Total company operating income and margin on an adjusted basis was 25 million, a 4% margin and on a GAAP basis 7 million, a 1% margin. With several exceptional items which negatively impacted our operating income and adjusted EBITDA, these items totaled approximately 17 million or $0.09 of EPS and fall into three general categories. First, acceleration of lastminute.com integration, including expenses to transition of Worldspan technology and severance charges across the Company, with these two items totaling approximately 9 million. Disposal of certain assets of 3 million, including a software write-off associated with upgrading to a new platform in Travelocity business, and other miscellaneous items of approximately 5 million.

In addition to these items, incentive expense for Travel Network spiked in the fourth quarter due to unexpected timing of certain payments in December. The good news is that our full year incentive costs were in line with our expected growth in the high single digits, and the growth in December is not reflective of a long-term trend. Diluted earnings per share on an adjusted basis were $0.22. This includes a positive impact due to a reversal of accrued income taxes of 20 million or $0.15 as well as the impact of the exceptional items I mentioned a moment ago. Diluted earnings per share on a GAAP basis were $0.09.

Now moving to full year results for total company. Revenue growth was over 18% totaling 2.4 billion versus prior year of 2.1 billion. Adjusted operating income was 306 million with an operating margin of 12%. And on a GAAP basis operating income was 261 million with an operating margin of 10%. Diluted earnings per share on an adjusted basis were $1.50 and $1.32 on a GAAP basis. Adjusted EBITDA was 392 million and GAAP net income was 172 million. Free cash flow was a 134 million with cash flow from operations of 226 million. Free cash flow came in lower than our previous guidance due to the timing of a pension plan contribution.

Before I move to the business unit full year results I would like to make a few comments about Travelocity’s fourth quarter. First and foremost, global performance metrics and operating results were quiet strong. We did report that Travelocity had an adjusted operating loss of 11 million in the fourth quarter. This loss was the result of the 8 million of the 17 million total company exceptional charges that I mentioned earlier, as well as the accelerated consolidation of ZUJI for 4 million. The GAAP operating loss was 24 million. In spite of these items, fourth quarter adjusted operating income from North America was a 11 million with an operating margin of 7%, and on a GAAP basis, was 9 million with an operating margin of 6%. And most importantly, in Europe we continue to track to the forecast we issued in September with anticipated dilution in the fourth quarter and $0.03 to $0.05 of accretion in 2006.

Now turning to full year results by business unit. All of our business units met the revenue and operating income goals we laid out at the beginning of the year. Travelocity had a great year and executed on all key metrics. Global gross travel booked for the year totaled 7.4 billion, 51% growth over 2004. North America gross travel booked was 6.2 billion, robust growth of 28%, far exceeding the industry average. Europe gross travel booked was 1.2 billion. Travelocity had total global revenue of 830 million and reached our growth projection of 65%. North America revenue grew 23% to 633 million, and revenue from Europe was 197 million.

As expected, Travelocity more than doubled operating income to 27 million with a 3% operating margin on an adjusted basis, and a loss of 3 million on a GAAP basis. Breaking that down regionally, North America grew operating income over 50% to 59 million with an operating margin of over 9% on an adjusted basis, and 52 million with an 8% operating margin on a GAAP basis. Europe had an operating loss of 32 million on an adjusted basis, and $55 million loss on a GAAP basis. Most of this loss is due to Travelocity Europe losses in the first half of the year prior to the lastminute.com acquisition.

Adjusted EBITDA was 48 million, North America was 75 million EBITDA, offset by a negative 27 million in Europe. For Travel Network, revenue for the year was 1.6 billion, growth of 4% with total transaction growth of 4%, both metrics in line with our expectations. In hotels, we had healthy 27% revenue growth, thanks to strong organic growth, merchandising efforts and the addition of SynXis. Together, car and hotel revenue at Travel Network grew 20%. Operating income for the year on an adjusted basis was 241 million with an operating margin of 15% and on a GAAP basis 224 million with an operating margin of 14%. Adjusted EBITDA was 228 million.

Airline Solutions had a tremendous year with revenue of 261 million growth of 7% and more than double the operating income. Adjusted operating income grew by over 25 million to reach 41 million with an operating margin of 16%, more than 9 points better than last year. GAAP operating income was 39 million with a margin of 15%, adjusted EBITDA end of year at 60 million.

Turning now to 2006, I remain very confident in the 2006 projections we provided in December. Our total Company revenue for 2006 is projected to grow approximately 15%, approaching the $3 billion mark. Adjusted earnings per share is expected to be greater than $1.70 for year-over-year growth of approximately 15%. GAAP earnings per share are anticipated to be greater than $1.20. We expect to more than double our 2005 free cash flow to approximately 300 million, with cash flow from operations of 415 million. For the first quarter projections, we anticipate revenue in the range of 680 million to 710 million and earnings per share of $0.21 to $0.25 on an adjusted basis and $0.10 to $0.14 on a GAAP basis.

It’s important to note with the addition of lastminute.com, the seasonality of our earnings has shifted and it will be significantly different than 2005. This new seasonality will put pressure on first quarter earnings with a corresponding positive impact in the back half of the year. In particular, Travelocity will loose approximately 8 million to 10 million more in the first quarter than last year. North America earnings grow, but due to consolidation and lastminute.com seasonality pulls down the quarter.

Lastminute.com bookings and cash flow growth will be significant in the first quarter. But due to seasonal patterns in Europe, a large portion of these bookings will be recognized as revenue in subsequent quarters. So a profile develops where Travelocity’s second quarter earnings were more than triple with continued high, year-over-year growth rate in the back half of the year.

Now I will wrap up with full year outlook by business unit, which remains unchanged for our outlook call in December. I will start with Travelocity. We expect 2006 global revenue to approach 1.2 billion, growth of more than 40%. North America is anticipated to approach 20% growth with Europe contributing between 440 million and 460 million of revenue, over 100% growth.

Operating margin for Global Travelocity is expected to approach 10% on an adjusted basis with GAAP operating margin in the mid single digit. North America operating margin including the consolidation of ZUJI, is anticipated to be in the low double digits on an adjusted basis and approximately 10% on a GAAP basis. The European operations adjusted operating margin is projected to be in the mid single digits with an operating loss on a GAAP basis. Adjusted EBITDA is also expected to triple to over 155 million. GAAP operating income is expected to be approximately 55 million.

Turning to Sabre Travel Network, revenue in this business is expected to be 1.6 billion with strong cash flows and a slightly improved operating margin in the mid teens. Adjusted EBITDA is anticipated to be over 320 million with GAAP operating income of approximately 240 million. Finally, moving on to airline solutions, we believe revenue growth will be in the low single digits, and expect a healthy operating in the mid teens. We also expect adjusted EBITDA of greater than 60 million with GAAP operating income of approximately 35 million. Now, I would like to turn it over to Tom.

Thomas Klein, President of Sabre Travel Network and Airline Solutions businesses

Thank you, Jeff, and good morning everyone. Before I get started let me correct one number from Jeff’s comments. Travel Network adjusted EBITDA was 282 million rather than 228 million. 2005 was a good year for our business. Throughout the year we used our position as the industry’s most efficient marketplace to extend our leadership and bring clarity to how travel will be distributed in the years to come. You will see us continue that in 2006. We believe this will be a year of noise and news, noise from others, but you can also expect to hear substantial news from us this year. We’ll strike new deals with travel agencies and suppliers, we will launch new innovations for the industry and the work we do will serve to stabilize and strengthen our business and the travel industry overall.

In 2005, both Sabre Travel Network and Sabre Airline Solutions delivered sound financial performance and launched new services to which our customers responded favorably. The Travel Networks performance was solid and the business is poised to continue to deliver consistent earnings stream and cash flow. Sabre Network also retained its number one position in the global marketplace and grew share while continuing to lead the industry in bookings from global travel agencies.

In our Airline Solutions business, we completed a second consecutive year of double-digit sales growth with 188 million of total contract values sold in 2005. The trend here is the key this represents 24% growth over 2004 sales and 61% growth over 2003. Our products and services helped airlines market, sell, serve and operate better, and we expect many of these products and services to remain strong. Looking more closely at our travel network business, its core strength is the efficient marketplace that brings together travel buyers and sellers around the globe on a greater scale than anyone else. All parties in the travel marketplace benefit from the reach and the immediacy of marketing through Sabre.

In the fourth quarter last year we made news when the industry named Sabre the worlds best TDS at the World Travel Awards in London for a record twelfth consecutive year. All of our current customers understand the value of our network. For example, in the past year we have launched new products to drive revenue and reduce costs for hoteliers; rewarding them with the best return on their distribution and marketing spend. We also competed well with all comers. While we welcome any innovation that helps make our industry better, we feel confident that we will continue to provide the most robust distribution to travel suppliers. We will continue to improve in strength in this business. We will grow content for agencies and consumers, and points of sale for suppliers and will enhance our value to all with innovative products, services and technologies.

Let me turn to the airlines for a moment. We are pleased that we made some headlines with our long-term, full content agreements with three US carriers to date. The two most recent being our agreement last week with Northwest Airlines, and today’s announcement with US Airways, the fifth largest US carrier that is the result of the recent merger of US Airways and low cost carrier America West. Obviously, we are pleased we have reached these latest two agreements. Northwest and US Airways are progressive. They think hard about distribution issues and have often come up with ideas about how to best market and distribute their products. While we’ve had our disagreements from time-to-time, it’s encouraging that we arrived at a good place together. Building upon our agreement with low cost carrier AirTran Airways last October, our business model and the value it provides is being validated where it matters most, in the marketplace.

We have gotten great feedback from corporations and travel agents, we do not want to return to the inefficiencies of a fragmented marketplace. They don’t want to step decades backwards. Airlines despite some of the public positioning, want access to valuable customers, and they need to have these customers served effectively, and that’s the value of the efficient marketplace we provide. We have also been busy around the globe signing new agreements with over 250 airlines that include full content provisions as part of our normal annual contract cycle.

Now let me expand on our hotel business our full year growth in 2005 was 27%. These revenues represent about 9% of our Travel Network revenue, and we expect the hotel segment to continue to grow in importance for us. This growth came in part thanks to innovative marketing services like Sabre Surround and Hotel Spotlight, plus the addition of SynXis to our portfolio. Spotlight and Surround enable hotels to promote directly to travel agents at the point the sale is being conducted. Sabre travel agents can better represent the hotel services and attributes to the customers. These are very powerful marketing services for hotels and they bring hotels more business, and higher daily spend from consumers. This year we will also launch a new consumer offering for travel agents called Trip Tailor, which builds upon the expertise Travelocity has developed with its total trip dynamic packaging platform.

So while we remain focused on keeping the airline side of our business in order, we are also executing against an aggressive plan to improve and grow other lines of business and be the partner of choice for travel agents. Growing our breadth of agency customers is also vital to the health of our efficient marketplace. No other company handles the needs of large, multi national travel agencies better than we do. It’s been a strong segment for us for many years. Our goal is to have the same strength with the global online business.

Our mantra on the cost side of the ledger is to ensure our cost reflect our scale advantage. We are already realizing savings through a program of initiatives. For example we know that last quarter we have made meaningful unit cost reductions in data processing. This is not a one-time focus. It’s a sustained march to consistently drive cost down. While we reduced the rate of growth and incentives over the last several years, they continue to grow faster than revenue and that’s not a sustainable trend for any business. We are determined to do better. Our goal is to run this business, maintaining margins in the mid teens. In closing, I am extremely confident about the prospects and the future of our business. We are using our leadership position to drive positive changes in the marketplace and within our own company to create long-term strength and stability. Thank you, and now I will turn it over to Michelle.

Michelle A. Peluso, Chief Executive Officer, Travelocity

Thanks Tom. 2005 was a break-through year overall for Travelocity. We outpaced industry revenue and gross sales by a significant margin. We doubled operating income with room for significant continued expansion in 2006. We continue to take share from our competitors and we expanded our reach globally.

In fourth quarter in particular, top line revenue growth continued to be strong. We recorded our eight straight quarter of greater than 25% revenue growth. Total year-over-year revenue growth came in at 86% and a very healthy 28% in North America with gross travel booked in North America up 31%. This quarter marked the highest top line North American growth rate we have seen all year. Our success in the North American business continues to be driven by our focus on the fundamentals and execution on our key growth channels.

We continue to see payoff from our differentiation strategy, namely to Travelocity Guarantee and our Customer Championship platform. As we have said for some time, competitive pricing is just a ticket to play in our industry, not a source of differentiation and we never lose sight of that fact. Customer Championship is a profound form of differentiation and you will see us take it to next level in 2006. In fourth quarter we launched our Activities Tab, further enhancing role as a provider of complete travel experiences. Along those lines, we’re also been executing on our strategy to enhance our role in key destinations. Finally, we continue to achieve significantly improved marketing effectiveness. In North America, we grew revenue at 2.5 times the rate of marketing spends in 2005. We also saw a very impressive improvement in all of our brand metrics, positioning us well for 2006.

Turning to our newer channels, our distribution businesses have been a very robust growth channel for us, fueled by growth at World Choice Travel and our partnerships with American Express, AARP, Continental and others. In 2005, our Travelocity Partner Network business grew at over 300% year-over-year. We recently launched our latest relationships, with Northwest Airlines, we power the cruise section on their website, and with US Airways to power hotels on their site. With respect to our portal partnerships, travelocity.com is going significantly faster than our portal relationships. In fact, in the fourth quarter, while total revenue grew at 28% in North America, revenue excluding AOL and Yahoo grew at 36%.

On the corporate side, Get There continues to grow at a robust clip. The total value of travel purchased via Get There surpassed 6.3 billion in 2005, a 31% increase year-over-year. In January we hit a single day record of 85,000 bookings, versus our 2005 record of 69,000 bookings. The Travelocity landed business landed Toys R Us, among other accounts and now supports Discovery Communications’ UK offices. Across all these businesses we continue to not only accelerate top line growth, but also look for sensible ways to drive costs out. Two key areas of focus for us in 2006 are call center efficiency and credit card merchant fees.

On the credit card side, we are aggressively looking at opportunities to reduce our high transaction cost including alternate forms of payment. Turning to Europe, our European operations registered solid growth in the fourth quarter with year-over-year pro forma gross travel booked growth in the 10% range on a local currency basis. As we discussed, our strategy in Europe is to manage our Travelocity Europe business, and our trade business for profitability. That means we will no longer invest aggressively in the Travelocity Europe brand, and we will exit those parts of the combined business that we do not feel have long-term strategic value. At the same time, we will focus on both revenue growth and bottom line profitability in the core lastminute.com business.

This focus is reflected in the numbers as well. If we disaggregate the 10% growth figure for Europe overall, gross travel booked for the lastminute.com brand grew at over 30% in the fourth quarter. And encouragingly, our early read on gross travel bookings growth in January is slightly ahead of our plan, particularly in the area of hotels where we are seeing continued impressive growth. On the integration front, the team is doing a very good job in driving the core integration activities well ahead of our expectations, to lay out just a few accomplishments on the integration side. We are consolidating three major UK facilities into one. We sold our stake in the German JV we had with auto, streamlining our operations in Germany. We have consolidated our technology and operations in the UK, France and Scandinavia. We merged the corporate travel assets from lastminute.com with Travelocity business, offering a more global solution to our multi-national corporate customers. We launched Travelocity merchant hotels throughout Europe, improving overall hotel sales nicely. We continue to consolidate call centers across Europe to improve efficiency and reduce cost. And we have taken many steps at lastminute.com and the companies it had acquired to deal with Sarbanes-Oxley compliance. And we anticipate tightening controls in a number of areas.

Moving to Asia, while not technically a fourth quarter 2005 event, we announced the completion of our ZUJI buyout on January 24. We’ve worked closely with ZUJI since its launch in 2002, both as an investor and as a technology provider, and we have great confidence in the management team. Integrating ZUJI will be a relatively simple task. ZUJI runs on Travelocity technology and uses many shared processes already. The ZUJI buy-in is the next step in our strategy of turning Asia into a large and profitable growth driver for Travelocity.

As you can see across each of our businesses, we had a fantastic 2005 and we’re off an encouraging start in 2006. In order to more than triple our operating income in 2006 and approach a 10% margin on an adjusted basis. We will stay very focused on continuing our path of differentiation in the North American marketplace, investing wisely in our newer growth channels to help fuel the next generation of profits for Travelocity integrating lastminute.com successfully and achieving our growth targets in Europe and bringing ZUJI more fully into the fold in order to accelerate our growth in Asia. And of course, underlying it all we have been thought leaders in the industry on how to craft mutually beneficial supplier relationships and we intend to keep our obsessive focus about being suppliers’ preferred partner of choice now on a global basis. With that, I will turn it over to Sam.

Sam Gilliland, Chairman, President and Chief Executive Officer

Thanks Michelle. As we said in our outlook call in December, our strategy for 2006 remains much the same as in ‘05. You will see us continue to extract benefits from our scale, growing our network with new agency partners and full participation from suppliers. We will grow globally keeping our strong core in North America, but seeking growth in Europe and Asia. We will reap the benefits from higher margin retail on merchandising initiatives and we will continue to use technology leadership to our advantage.

Clearly, we have a lot of hard work ahead of us in ‘06, but this team has demonstrated that it’s more than up to the challenge. We will demonstrate that again this year by more than doubling free cash flow to approximately $300 million; adjusted EBITDA of greater than $500 million, growth north of 25%, revenue approaching $3 billion and earnings per share of greater than $1.70 on an adjusted basis. So we are excited about our successes in 2005 and our prospects for growth in 2006 and beyond. And with that, let’s go to Q&A.

Questions-and-Answer Session

Operator

Well indeed and thank you very much everyone for your time in that presentation today and ladies and gentleman and as we just told at this point we turn towards your questions and comments. We invite you queue up simply by pressing “*” then “1” on your phone keypad. And you do hear a tone indicating you’ve been placed in the queue and if you wish to move yourself from the queue simply press the “#”. So once again ladies and gentleman to ask a question please press “*”, “1” on your touchtone phone.

And first in queue, we go to the line of Jim Kissane, representing Bear Stearns. Please go ahead.

Q - James Kissane

Yeah, thanks. Sam or Tom, can you provide a little more color on the new GDS deals? I think originally your goal was to be revenue neutral, then it was profit neutral. So how are these deals turning out relative to your goals?

A - Sam Gilliland

Well, I will start it off and Tom can certainly jump in. I think in terms of the goals we set, they are consistent with those goals. Clearly, as you have heard us talk about 2006, we are talking about slightly improved margins in the Travel Network business and the deals that we’ve struck are consistent with the goals that we set forth. I don’t think really anything is changed in terms of our intentions there. These are, and I might just provide a little more insight on the deals themselves, although as you recall I said we won’t provide a lot of economic or financial detail on these deals. They are, this most recent one announced today was again a five-year deal, full content. There are certainly some aspects of their websites in each case that Travelocity is powering with its own content, so you probably saw that. But the rest of these deals, rest of the aspects of these deals, components of these deals are confidential and so we won’t talk in a lot of detail about the financials. Tom, anything?

A - Thomas Klein

Yeah, Jim, I would also note that two of the three deals, the AirTran, and the America West portion of US Airways deal, we didn’t have full content with either one of those airlines before. So there is opportunity for growth with both carriers and I suspect that’s going to continue to be trend in the market.

Q - James Kissane

Okay. Then just for Michelle, based on the fourth quarter revenue and the first quarter guidance, it seems like last minute, from the outside, may be under performing relative to your expectations. Can you provide a little insight; maybe give us the apples-to-apples growth rate for last minute?

A - Michelle Peluso

Sure Jim, let me talk about first quarter in particular. We’ve made a conscious decision to accelerate some of the synergies, and particularly with our Travelocity Europe brand and some of the other businesses that lastminute.com was in, to manage more towards profitability and the bottom line rather than revenue growth. So if you disaggregate the fourth quarter numbers on a gross travel booked basis, I told you, Europe was approximately 10% in a local currency basis. The lastminute.com brand grew at over 30%, so we certainly think that’s keeping track with the marketplace in Europe. And I imagine you’ll see us do the same thing with going into 2006. We’ll focus on the bottom line, particularly in those non-core assets and focus on both revenue and bottom line improvement in the core consumer brand of lastminute.com.

Q - James Kissane

Okay, I apologize, just one question for Jeff. Jeff any update on your plans for refinancing the $800 million bridge?

A - Jeffery Jackson

Yeah, just a little bit of an update from what I described in the fall and in December. We do expect to begin the process on the financing probably by the end of first quarter, so that will be underway by the end of the first quarter. Some of the funds for the bridge to refinance it will come from internal funds; some will come from refinancing in the public and private markets. We are continuing to look at debt and equity like securities, so we haven’t made our final judgments there and we’ll be subject to market conditions, but at these levels, we prefer not to issue equity.

Q - James Kissane

Great, Thanks Jeff.

Operator

And thank you very much, sir. Next, we will go to the line of Jeff Kessler representing Lehman Brothers.

Q - Jeffrey Kessler

Thank you, a couple questions. First, in the release, that you have noted that ZUJI is the leading travel agency in its region. On what metrics are you basing that and who do you regard as the major comps to ZUJI?

A - Michelle Peluso

Sure, so ZUJI is one of the very few agencies that really operate in multiple countries across Asia, so it really is one of the few Pan-Asian online travel brands. It also won an award just recently from the industry, the TTG award, for best Online Travel Site, in ZUJI, which we were excited about. Best online travel site in Asia. In terms of our competitors they are certainly the typical ones you would expectCendant, Expedia and the like, and then there are a host of regional competitors. And of course we are always looking at the competitiveness of airline websites as well, when we think about overall ZUJI performance. ZUJI had a great year in 2005 growing at north of 80% and we are excited to have it fully in fold now in 2006.

Q - Jeffrey Kessler

Michelle, you also mentioned that you, and just in passing, hopefully, that you are intending to somehow to get away from credit card payments, that intriguing or what, what form of payment are you proposing?

A - Michelle Peluso

Sure, we are actually looking at lot of different options and we are certainly not the first in the retail industry to think hard about fees. Online players in general, pay more than offline players and I just think there’s a real opportunity. We are talking to a lot of leading companies in the alternate payment space, and we think there might be some possibilities.

Q - Jeffrey Kessler

Okay, with regard, if I could rehash an old issue that keeps coming up. Perhaps you could talk about the relationship currently between Worldspan, Expedia and Sabre and how that is developing with you, your relationship with Expedia?

A - Sam Gilliland

Yeah, I think probably the best thing there is to rely on the views that Expedia would provide to you. I think more directly. Certainly what we have heard, and this is from some trade publications, we have heard that there is an intention on Expedia’s part to begin moving bookings our way in the summer timeframe. But again, they would be best to ask about that.

Q - Jeffrey Kessler

All right, final question can you, you, you gave a couple of organic growth metrics. I am wondering if you could elaborate on that a little bit?

A - Michelle Peluso

Which, which part…

A - Sam Gilliland

Which one do you…

Q - Jeffrey Kessler

I am giving you an open forum here to give us as many as you can.

A - Michelle Peluso

I’ll start in Travelocity and then and turn it over. On the North American business, we grew a very robust 28% in the quarter and 31% in gross travel booked. And that is our highest revenue gross quarter for North America this year. We are certainly very encouraged by the continued trajectory. As a matter of fact, by our numbers if you look at year-to-date for the third quarter, and again our competitors haven’t announced, we have almost doubled their rate of gross travel booked growth for the year, which we think is strong and certainly positions us well for 2006.

Q - Jeffrey Kessler

And what about the Travel Network?

A - Jeffrey Jackson

On the Travel Network side, I mentioned the 27% growth in hotel. And this is an area where I believe we have a bigger base of business to start from than anybody else in the industry and we’re building on that base. And we continue to expect to see double-digit growth rates in hotel and also an expansion of services that we provide to hotel. So I think that’s, we are very bullish about our hotel growth.

Q - Jeffrey Kessler

Okay and can gross bookings for the whole division be considered organic?

A - Jeffrey Jackson

Yes.

Q - Jeffrey Kessler

Yeah. Okay. And I think that is all the questions I have now. Thank you.

A - Sam Gilliland

Okay, thanks Jeff.

A - Michelle Peluso

Thanks Jeff.

Operator

And we thank you Mr. Kessler. Next we go to the line of Justin Post representing Merrill Lynch. Please go ahead.

Q - Justin Post

Hi, first question, can you clarify the charges in the tax benefit in the fourth quarter? You went through it pretty quickly, the EPS, net revenue, I am sorry, the net expense impact and the net EPS impact for the positive and the negative?

A - Jeffrey Jackson

Yeah, I will go back through that. Let me start with the expense side. What I illuminated were $17 million and $0.09 of EPS of exceptional items. There were really three categories. $9 million in the category that was acceleration of integration expenses at last minute, including a charge that we took in the quarter that will transition us off of using Worldspan. Then we had a second category of 3 million, which was principally a software write-off as we are well along on an upgrade on a platform at Travelocity business. And the last one was just a miscellaneous category, 5 million there was, I didn’t say this, but there was a two year old Abacus balance sheet write-off, for example, in there, things of that nature. That totals 17 million. And then the tax, which of course was in the Federal tax line, was 20 million and those are the items that I laid out.

Q - Justin Post

The tax was $0.15?

A - Jeffrey Jackson

Yes, and beyond that I think you should just do the further calculations of your interest.

Q - Justin Post

Okay. Great and then can you talk about the guidance for last minute? Obviously, a little bit different than the Street was thinking as far as your quarterly EPS numbers. Can you talk about how the bookings are recorded in last minute and when you record the revenues and the profitability?

A - Jeffrey Jackson

Yes, it’s really, we record the bookings and the revenue the same way we do in domestic Travelocity. It’s just that the travel patterns and the mix of product is a little bit different. So there is a lot more things bought early and a lot more things which are non-air in vacation. So they are bought early, they are consumed much later in the year, typically in the summer in the second and third quarter. And that’s really, in this sort of simple description, the reason that this happened. That’s why in my remarks, I mentioned that we had and will see a significant bookings growth and cash flow growth, but the revenue will hit more in the second and third quarter. And then naturally because of the leverage it’s a very dramatic impact on year-over-year operating earnings for last minute and Travelocity in the second and third quarter. So you are going to some really large year-over-year earnings growth rates that I enumerated in the second, third and fourth quarter for Travelocity and thus the whole Company.

A - Michelle Peluso

And Justin, just to give you a real simple example, in Europe over 80% of our revenue comes from non-air. As you know, we book in, effectively book the revenue for air when the booking is made. So in North America we have a much more air-weighted business and so hence, as people are booking packages in Europe in January for instance, that revenue tends to consume over the summer months.

Q - Justin Post

Okay great. And then can you help us a little bit on the Travelocity bookings numbers? First, it looks like you have a little net revenue decline, because revenues grew a little bit slower than bookings, although your hotel metrics look really solid; so maybe elaborate a little bit on that? Then on the Travelocity bookings, can you give us, it’s a really strong growth rate, any detail on what’s being contributed from say, white-label or corporate, is there any of that being, helping out your growth rate there?

A - Michelle Peluso

Sure, well let me start with the first one. Actually, it’s a fairly good story in terms of gross travel booked being up 31% in revenue and North America being up 28%. As a matter of fact, we have been working very hard with our carrier partners to try to improve yield as a way to add more value. And our yield for airline tickets is up 8% in the fourth quarter, versus the industry average of about 4%. That is at roughly $25 a ticket, which accounts for the entire difference between gross travel booked and revenue. So it’s certainly a focus for us to try to continue to improve yield where we can on behalf of our partners. In terms of your second question was on, I think, that what, if you disaggregate some of the corporate and partner network, how did growth look. I will say, and I will go back to what I said, if you actually take out AOL and Yahoo, growth went from 28%, goes all the way up to 36%. So the North America business is incredibly strong. Of course Travelocity Partner Network continues play its part, had a nice solid growth year, and corporate had a nice solid year as well, but the core travelocity.com business is extremely healthy.

Q - Justin Post

Great. And then Sam, if you want to comment at all on market share GDS. I don’t know if you got to that in your comments, but how is that trending?

A - Sam Gilliland

We had a slight improvement as we got to the end of the year, so year-to-date slight improvement in share on a global basis.

Q - Justin Post

Thank you.

Operator

And thank you very much sir. Now representing Morgan Stanley. We go to the line now of Chris Gutek for our next question. Please go ahead.

Q - Chris Gutek

Thanks. Michelle, I’ve got a series of related questions on last minute and integration issues of last minute. It sounds like there are significant costs for the integration in Q4 and as well in Q1. To what extent is that just purely an acceleration of costs you had expected to incur as opposed to those costs tending above what you originally budgeted? And related to that, what exactly, what activities are you accelerating and why are you doing that?

A - Michelle Peluso

Sure, most of it is an acceleration of charges and just to give you a few examples, we decided to consolidate Travelocity Europe technology and last minute technology in the UK, France and Scandinavia ahead of our initial expectations. So we did take some technology costs, for instance, to do that. We also announced the closing of a couple of our UK offices faster than we had anticipated. And so we are taking some of those charges for severance and consolidation, as you would expect. And then finally, we are working faster than we had anticipated at transitioning off of some of our other GDS partners to Sabre and so there is that piece as well.

A - Sam Gilliland

Yeah I would…

A - Michelle Peluso

I think we’ll return to our expectations in 2006.

A - Sam Gilliland

I think the other thing I would say is that as it relates to the overall deal model that we had built for lastminute.com we are tracking very, very closely to it; we feel very good about the progress versus that plan.

A - Michelle Peluso

And that’s in particular the $0.03 to $0.05 accretion we have laid out there for 2006. We continue to be confident in that number.

A - Jeffrey Jackson

And really, if you go even further and go back to some of what we are talked more about in the fall, we have a really a two year integration plan here and 2007 and the 15% growth that we talked about in December for 2007 for the total Company. A lot of that is driven by getting a lot of the expenses that you refer to Chris, finished. A lot of the financial work, a lot of controls work, is going to be ongoing through 2006, that will conclude over time and that’s a big driver of our growth in 2007, for both Travelocity and for TSG.

Q - Chris Gutek

It’s sounds like your pretty happy with the progress. And are there any challenges that caught you by surprise? Or by contrast, are you actually very confident that there is smooth sailing going forward?

A - Michelle Peluso

Well there are always challenges, it’s certainly a big integration, but I think the teams are doing a fantastic job of going after the areas that we laid out as core. While at the same time keeping our eye very firmly on the revenue growth story particular for the consumer lastminute.com brand and not, losing any grounds on revenue growth. So I think that’s right. We mentioned we anticipate we will be tightening controls across the business, both at the core lastminute.com business and which really was the result of a bunch of acquisitions. So we are going kind of company by company, and making sure we have the proper financial controls in place.

A - Jeffrey Jackson

Yeah, just to repeat, it has been fairly gratifying so far because there have been tons of challenges, and really not many surprises. So if that keeps up we will be really pleased.

Q - Chris Gutek

On the GDS contract renewal, you guys are making pretty good progress here it seems like. Are you fairly far down the curve with all the airlines? Or by contrast, with some of the airlines that have made a bit more noise about wanting greater cost reduction or price reductions? Do you think it will take a few more months before you get those airlines signed up?

A - Sam Gilliland

Well I guess I would, apologies here on this one, Chris. I am not going to provide a ton of insight for you. I think the bottom line is we are in productive discussions with the airlines we would expect we would be talking to it at this point. We are tracking pretty closely to where we wanted to be. When we were talking about this really over the course of the back half of last year, we said we expected we’d get deals done, either in the very late part of ‘05 and early into ‘06, and that’s what we’re doing. We continue to work through negotiations with a number of other carriers. So, good productive discussions and we will just continue pushing forward. The other thing I would say, Chris, is that we’re being patient. I think we were interested in getting to a good place with each of these airlines; that they feel good about the models that we’re pushing forward. Obviously we want to feel good about that as well, but so far so good.

Q - Chris Gutek

And then finally a quick one for Jeff. Jeff, I might have missed this; what were the gain on sales for the European asset and the $15 million supplier settlements? What were those issues?

A - Jeffrey Johnson

Anything that we want to say or elaborate on is in the reconciliations, which is attached to the press release.

Q - Chris Gutek

But in terms of that supplier settlement and the $15 million…

A - Jeffrey Johnson

Yeah. We are not commenting specifically about the number of the supplier settlement, or in Europe.

Q - Chris Gutek

Okay. All right, thanks.

Operator

And thank you very much, Mr. Gutek, a question now from Michael Millman, representing Soleil Securities. Please go ahead.

Q - Michael Millman

Thank you. Just following upon what you just said and then going forward. How much is the integration cost in ‘06 that will be completed and not affect the ‘07 numbers?

A - Michelle Peluso

Yeah, I mean integration obviously takes a long time rate but as Jeff mentioned before is we are working very hard to try to get as much of the integration cost out of the way as soon as possible so we can continue to reap the benefits of the higher margin growth business. Beyond that, it’s hard to comment on what percentages in ‘06 versus ‘07, but our job is to have nail the numbers in ‘06, and that’s our intention.

Q - Michael Millman

Can you give us ballpark we are talking, about 10 million or a 100 million?

A - Michelle Peluso

We haven’t broken that out, Michael.

Q - Michael Millman

Okay.

A - Michelle Peluso

As you know, we did give you a raw guidance in our outlook call for how we expect for 2006 and 2007, and we still feel confident in those numbers.

A - Jeffrey Johnson

Yeah, you may recall, Michael, that we talked about EBITDA margins north of 20% in ‘07 for the full Travelocity P&L.

Q - Michael Millman

You mentioned, I think, that you’re on Travelocity that your ticket, air ticket yield was up 8% to $25. Some of your, I think Expedia price-line talked about how their ticket revenues have been dropping?

A - Michelle Peluso

Yeah, so there is a different between ticket yield and ticket revenue just to be clear. Ticket yield is a the price that we actually well, I should say that the price that we sell an air ticket for went up by $25 for Travelocity, which we think is faster than the industry average from the data we have. Our average, what we make, the revenue we make off an air ticket, our competitors have talked about sizeable compression in the past two quarters. We haven’t, we really haven’t seen that same kind of significant downward trend. Certainly the air carriers are working closely with us to make sure that we continue to provide value. One those ways for us has to be, how do we improve yields for them? And how do we improve, maybe average ticket sold, and give them incremental value in that way. So we are working hard on it.

A - Jeffrey Johnson

And just to be clear on that, Michael, when we were talking about yield in this case, when Michelle was commenting on yield in this case, that is a contribution to growth in gross sales for the airlines. It’s using airline vernacular to talk about yield, so therefore the overall ticket price.

Q - Michael Millman

On this ticket price, is this a mixture of corporate and leisure, and can you break those out?

A - Michelle Peluso

Sure, just the mixture of corporate and leisure, in as much as Travelocity business is in our numbers, but as you know, Travelocity business is still a very small portion of our overall, our overall revenue and so the vast, vast majority of that is leisure.

Q - Michael Millman

On your gross bookings, it sounds like you attribute your doubling the industry average to your consumer relationship initiatives. Could you give us some of the metrics, namely conversion rates, or repeat customers to sort of bolster…

A - Michelle Peluso

I think it’s a bunch of things Michael. I think first and foremost we have great pricing on foundational, some industry studies suggest we have better pricing than our competitors. That’s a ticket to play. Secondly, we have overhauled a lot of our products and I think we’ve got strong products across the board, we implemented new FlightPass, for instance, that we have seen a nice improvement there. Third, we certainly believe firmly in customer championship. Some of the statistics I would point to is satisfaction for callers who call our call centers and know about the guarantees, is more than 20% higher than those who don’t. So we certainly think that we are driving more satisfaction with our customers by having a guarantee out there, and frankly by changing so many of our underlying business processes to be a more quality organization. Fourth, and very critically, our marketing effectiveness is fantastic. We have, we grew revenue in North America 2.5 times the rate of marketing spend. So I think we are doing a good job of driving our marketing spend to the right channels and getting the right return on investment. Finally of course, supplier relationships, we continue to be, really, thought leaders in how do we craft mutually beneficial relationships. We expect that will continue to pay dividends. I think all those come together to point to why we are growing at double the rate of our competitors.

Q - Michael Millman

Can you point, can you give us any metrics on conversions?

A - Michelle Peluso

Yeah conversions are really hard. As I have been a critic in the past of some of the third party medium metrics and the like in terms of visitor sessions, its really hard, Michael, because not all traffic is the same. Even for instance, we are much happier to sell one total trip than we are to sell one air plus one hotel, which would strengthen your conversion if you sold two things. We prefer from a revenue perspective and a customer experience perspective to sell a total trip. We have really gone away from measuring ourselves on conversion. We measure ourselves a lot on year-over-year and we are encouraged by the improvements.

Q - Michael Millman

Finally, on the GDS deals. Can you tell us on these five-year deals. Are they fixed for five years, or is a lot of flexibility how the end years work? Secondly, have you crafted these deals in such a way that it will be very difficult for other GDS to sign on to the same deal without being significantly disadvantaged?

A - Jeffrey Johnson

Mike, we are not going to comment on the terms of the individual deals. We’ll just say that we are crafting them in a way that we think suits our company very well. And obviously, the fact that people are signing up says it fits the airlines as well.

A - Sam Gilliland

Yeah and I think the other piece of it is that we have included, we anticipate an impact of these deals in our ‘06 and ‘07 projections. That’s all, that’s really all the more color that we will provide there. I think the other thing I have said on past calls, is that we are interested in a healthy GDS industry and healthy competitors, so we think that’s a good thing. That might give an indicator in terms of any way we are structuring these deals.

Operator

And thank you Mr. Millman. Now our next question we go to the line Jake Fuller representing Thomas Weisel. Please go ahead.

Q - Jake Fuller

Hi guys. You had mentioned Jeff, the spike in incentive fees for the fourth quarter. Can you give me little detail as that to how that works? I guess you pay agencies incentive fees based on an estimated volume. If they beat that volume, you have had the true-up payment. Is that essentially what that is?

A - Jeffrey Johnson

That is accurate for a certain segment of our agencies. I think that, Jake, you hit on a decent explanation for a good part of what the spike was. There are many, there are in fact, many different kinds of calculation methodologies. I don’t want to go into every single one, put you all to sleep. I do think that kind of thing is what drove the spike or most of the spike in the fourth quarter.

Q - Jake Fuller

Would you give a quantification of how big that spike was above and beyond normalized fees?

A - Jeffrey Johnson

No, no, we didn’t. I would just say that, that spike and the other items that I laid out really do go to explain the vast majority of any variance in the quarter.

Q - Jake Fuller

So, that spike wasn’t included in your other category, which was 5 million.

A - Jeffrey Johnson

That’s correct, it was not.

Q - Jake Fuller

Okay. You talked a whole lot about the DCA or you have new contracts. What about the non-DCA pricing. Is there anything you talk about, an average increase for non-DCAs, anything like that?

A - Jeffrey Johnson

No, Jake, but as I said, we’ve gone out with, we have over 250 carriers signed up for their 2006 pricing. That’s part of an annual contract in the old process. The difference in those contracts from what we have done in the past is that they include full content provisions and they are 12-month contracts, as opposed to the standard GDS contracts which is historically been 30 day out.

Q - Jake Fuller

And those contracts are now effective for the New Year?

A - Jeffrey Johnson

They have been affected; yes they have been effective since January 1.

Q - Jake Fuller

Can you say if overall pricing was up or down, even if you can’t quantify?

A - Jeffrey Johnson

It went up.

Q - Jake Fuller

Okay. Then outside of the airlines, things like hotels, any non-air fees, are those up or down?

A - Jeffrey Johnson

We expect them to be up, across the other categories.

Q - Jake Fuller

And as you look at your total reported volume, what percentage of that volume is non-air?

A - Jeffrey Johnson

We talked about 10%, up 15%.

Q - Jake Fuller

Okay got it, and then Michelle on the, you guys made for the first time, I think it was the first time, your room night numbers. Can you give us a sense of what the breakout is in that between merchant and agent?

A - Michelle Peluso

No we don’t give breakouts on, Jake, but thanks for asking. We have such different businesses. We have WorldChoice Travel, for instance, which tend to be more published. Packaging, which tends to be 100% merchant, and in standalone, which is a mixture of both. We will say that in general, we are seeing increases in merchant mix.

Q - Jake Fuller

Can you give any sense of international versus US in the hotel price?

A - Michelle Peluso

We are not going to break that out, Jake, but we did see very robust growth on both the European business and the North America business in hotel room nights; impressive growth on both sides.

Q - Jake Fuller

Great, Thank you very much.

A - Michelle Peluso

Sure.

Operator

And thank you Mr. Fuller and our final question today we go to the line of Scott Devitt representing Stifel Nicolaus, please go ahead.

Q - Scott Devitt

Thanks, two questions. First Michelle, I was wondering if you could talk about last minute in detail related to trends in that business with packaging toward unbundling online-offline, just a little more granularity as to what’s occurring in Europe with the business. Then Jeff, the free cash flow numbers, I wonder if you could quantify the pension plan contribution and then also talk to the difference in the cash taxes that you paid in the quarter versus what you were originally estimating, and how that may have impacted your full year free cash flow. Thanks.

A - Michelle Peluso

First Scott, on lastminute.com side and the European side overall, and I expect this to be a similar trend at our competitors. We are seeing solid air growth, we are seeing very strong hotel growth, we are seeing nice dynamic packaging growth. Lastminute.com, unlike some of our competitors has a traditional, pre-packaged holiday business and that has not grown. We have actually seen that struggling a bit. I think that is essentially consistent with some other core providers. But we are seeing strong growth in those products. We effectively make and manufacture ourselves hotels then in packaging in particular, and solid growth there.

A - Jeffrey Johnson

And your first question was on the free cash flow situation and the pension. I guess that I’d say without being too specific on the number, because we generally don’t talk about that but the pension contribution was the principle amount of the shortfall versus what we had said to you earlier, or late in the fall, earlier. The reason for it, and the reason for it being somewhat unexpected is because that we made a number of changes and assumptions. Our pension plan is very healthy, very well funded, but there were just a number of changes and assumptions that we made. We just thought it would be prudent to put the money in. The tax situation was non-cash. We had a sense that there would be, that because of the way the accounting works and the statutory of limitations that there would be, that we would have a reversal but we were very unsure as to the amount. In any case it was non-cash.

Q - Scott Devitt

Thanks and congratulations on the two GDS signings, by the way.

A - Jeffrey Johnson

Thank you.

A - Michael Gilliland

Thank you very much.

Operator

And thank you Mr. Devitt, well with that Mr. Gilliland, I will turn the call back to you for any closing remarks.

Sam Gilliland, Chairman, President and Chief Executive Officer

Just want to thank everybody for joining the call and we look forward to catching up with you in person here sometime over the next couple of months. Thanks everybody.

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