Hoteles City Express SAB de CV

BMV:HCITY

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, and welcome to the Hoteles City Express First Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note, your event is being recorded. I would now like to turn the conference over to Michelle Loh from InspIR Group Investor Relations. Please go ahead.

[Michelle Loh, executive]

Thank you, and good morning, everyone. Hoteles City Express' first quarter 2018 results were released yesterday after the market closed. The company's earnings release can be found on the Hoteles website at www.cityexpress.com. During this call, management's comments may include forward-looking statements, and we ask that you please refer to the legal disclaimer in the quarterly reports for guidance on this matter. Joining us on today's call are Mr. Luis Barrios, CEO of Hoteles City Express; Mr. Paul Smith, CFO; Mr. Santiago Parra, Corporate Finance Director; and Mr. Santiago Mayoral, Corporate Finance and Investor Relations Vice President. Mr. Barrios will begin with some opening remarks, after which Mr. Smith will present the company's financial results. Mr. Barrios will begin with his opening results now, and it's my pleasure to turn the call over to him.

[Luis Eduardo Barrios Sánchez, executive]

Thank you so much. Good morning, everyone, and thank you for joining us to discuss Hoteles City Express' first quarter results. We reported a very strong first quarter, supported by solid fundamentals and a positive outlook for Mexico. The country is in a more stable macroeconomic position than it was 12 months ago. NAFTA renegotiations are likely to be constructed for the region. And these, coupled with economic growth in line with expectations; historically low levels of unemployment; a growing salary; and a worker base and strengthening consumer dynamics underpin strong demand for quite high-quality rooms throughout the country. We continue to foresee economic growth, and we are set to continue the pace of our investment plans. The industry continues to grow, with demand outstripping supply by almost 6% on an annual basis. This trend is very positive for Hoteles City as we continue to see strong demand for quality rooms at affordable prices, with softening in the ADR growth as well as increased occupancy rates. At the end of the quarter, our portfolio was comprised of 137 properties. By the way, today -- last night, we opened another one. So we are at 34 -- 138 by now, an increase of 13 units over the 12-month period. Hoteles City Express to-date has more than 15,400 rooms in 30 states and 68 cities in Mexico, along with a portfolio of properties in additional 4 countries throughout LatAm. The strong operating results in the quarter translated into solid financial results, where we continue to see leverage from scale, with growth in EBITDA continues to outpace revenue growth. Throughout the quarter, we grew sales, with occupancy increasing close to 300 basis points to 58.3% and ADR to MXN 977. Combined, this resulted in RevPAR of MXN 559, a growth of 7% or 200 basis points above inflation for the period. Regarding financial performance, improved productivity, along with our real-time pricing capabilities, continued to produce margin expansion. As compared to the prior year, we increased adjusted EBITDA margin to 35.1%. Our solid first quarter results demonstrate the strength of our business model, and our commercial efforts are key to maximizing the profitability of every one of our properties. On the development side, we opened 2 new properties in the quarter and have more than 37 projects under construction, in advanced stages of permitting and licensing that will open over the next 2 years.

In this regard, we are on track to open 21 new units with more than 2,400 rooms coming to the 2018 pipeline.

Finally, I am pleased to share with you that the company is in the final stages of the launch of FIBRA STAY, offering that has been greeted with a market interest. With FIBRA STAY trading, investors will be able to validate the performance of our portfolio and benefit from a clear growth path, supported by a strong pipeline. This structure will strengthen our capacity to boost the number of hotels we put into operation each year; raise ROIC based on price; reduce capital intensity; and create a more efficient tax structure. With unanimous approvals secured at the shareholders' meeting on February 15, FSTAY is approaching the end of its IPO process, and we expect to be trading over the next weeks. Thank you for your confidence. We will continue working tirelessly to be the best choice for profitable growth in the Mexican hospitality industry. I would like to hand the call to our CFO, Paul Smith, who will provide you with further detail on our financial and operational performance. Paul?

[Paul Márquez, executive]

Thank you, Luis. Hello, everyone. My comments are based on our first quarter 2018 results, which were prepared under IFRS. As we've noted, the momentum from last quarter continued as we posted historic record figures for the company. At the end of the first quarter, Hoteles City Express had 137 hotels in operation, with more than 15,460 rooms, up almost 12% from the prior corresponding period. Occupied room nights were more than 60% higher over the prior year's first quarter. And we had a total stock capacity of 1.4 million room sites, a rise of 11% year-on-year. Strong demand grow chain-wide occupancy, which increased to 58.3%, almost 300 basis points higher than the year-ago period. We continue to see strong momentum and expect this trend to hold up through the rest of the year. Our well-located properties, sophisticated approach to yield and price management and the continued mismatch in supply versus demand in the industry supported the top line strength of our properties over the quarter, with ADR up to MXN 977. We achieved RevPAR growth of 7% to MXN 569 from the same period 1 year ago. Our established properties, which have been in operation more than 36 months, had occupancy levels of 61.3% for the period. These properties had an ADR growth of 1% and RevPAR growth of 3.4% to MXN 578.

At the end of the quarter, the chain had 96 established and 41 non-established hotels in the portfolio. The established hotels saw a 3.4% increase in RevPAR and a 1% decrease in ADR and more than a 1% increase in occupancy. This is on top of a high comparable for the prior year. On another note, occupancy in the FSTAY portfolio was 61.8% versus 56.4% of the non-FSTAY portfolio. Additionally, ADR for this portfolio was 5.2% higher than the rest of the consolidated hotels. This allowed us to grow the RevPAR of more than 50% higher than the rest of the portfolio, demonstrating the significant potential for our ramping-up inventory to achieve over the next 18 to 36 months.

Regarding the IFRS results, consolidated revenues were MXN 686 million, 20.1% higher than a year ago, and strong operating metrics translated into financial results. The total costs and expenses grew 74.5%, which was mainly in line with the growth in revenues, and our rate of growth of 16%, as we need to dip, and sales expenses grew at the half of the rate of the revenue growth, demonstrating our ability to continue to leverage our operating structure. With increased absorption of our operating infrastructure, as we add rooms to the portfolio, we continue to see ongoing leverage and increased profitability in the quarter. The company posted a close to 30% rise in operating income to MXN 142.5 million, while adjusted EBITDA rose 23% to MXN 241 million.

Operating income and adjusted EBITDA continue to expand ahead of the revenue growth. While operating income and adjusted EBITDA margins rose by 150 basis points and 80 basis points, respectively, to 20.8% and 35.1%.

The total financing cost increased to MXN 79.6 million in the quarter as we drew down on bank financing for a hotel construction over the last 12 months. Our cash in bank balance was lowered, and we saw increases in interest rates during the period. Net income rose to 31% to MXN 50.3 million, delivering a net income margin of 7.3%.

Turning to our balance sheet. At the end of the quarter, we had just over MXN 835.8 million in cash and equivalents, down 29.8% from the previous quarter, as we partially utilized all resources in execution of the development rollout. We remain focused on optimizing the balance sheet and maximizing overall ROIC. Financial debt, net of interest payable, decreased 5.3% as compared to the end of the year, and is now MXN 2.6 billion. The company's debt remains mainly long term, with only MXN 110 million during the next 12 months. We have clients [indiscernible] available to this work if needed of approximately MXN 1.2 billion. Net debt at the end of the quarter was slightly over MXN 1.7 billion. We are pleased with the continued strong results that we are delivering and the promising outlook in the market for our hotel chain. With a strong balance sheet and efficient operating structure and experienced team, we expect to continue to drive profitability, while picking up the pace of expanding the portfolio in the year. Thank you for your attention. Operator, we can start the Q&A.

[Operator]

[Operator Instructions] The first question comes from Marimar Torreblanca from UBS.

[Marimar Torreblanca, analyst]

I have 2 questions. The first one is if you could give us some color on the FX loss you had this quarter and potentially some guidance on this metric going forward. And then the second one is if you could speak a bit about the recent trends you're seeing in occupancy, if there is a change or a pickup in occupancy that you think is related to the campaigns in Mexico. Or are you seeing normal trends to what you would expect in regular April and other year?

[Paul Márquez, executive]

Marimar, thank you very much for the questions. This is Paul Smith. On the FX loss, we have basically 2 vehicles denominated in foreign currency. One was actually liquidated in the first -- at the start of the year, basically in January, and we basically recognized the payout of that metric there. The other one is the financing vehicle we have denominated in U.S. -- in Chile and U.S. for the Chilean land banks and development we have in Chile. And as you know, that basically moves accordingly with the differential rates between the Chile and U.S. and the Mexican peso. We are no longer exposed to USD in debt as we liquidated that vehicle in the month of January. Going forward, as the movement between the Chile and U.S. and the Mexican peso are not necessary aligned, we will continue to see movement -- noncash movements in that parameter. And probably, from here to the elections, we will see some volatility in that regard as well. In terms of occupancy, there are 2 things to consider for the quarter. One is that the Semana Santa actually happened in March this year, vis-a-vis April. Other than that, we're just seeing strong market dynamics supported, as we've mentioned, by strong consumption that is also supported by a real increase in wages and employment in the country.

[Marimar Torreblanca, analyst]

How about occupancy more recently? Like in April, are you seeing -- now that the campaigns are all up and running, are you seeing a change in trend? Are you seeing more demands for your hotels from campaigns? Or is it not really something that you expect to see in your brackets?

[Luis Eduardo Barrios Sánchez, executive]

Well, the -- this is Luis. Thank you, Marimar. I would say that the -- April has been a very robust month in terms of occupancy. And part of it is that we had a -- including the Semana Santa and the second week after that Semana Santa. And I would say that, definitely, when there are elections, more people move. But you have to remember that, really, the campaigns -- the local campaigns begins 60 days before. We only had a presidential campaign going around the country, which was the [ initiations ] of them. And even though, with the presidential campaign, there's not too many traffic until -- not until the local campaigns starts. So we'll begin to see some traffic on the campaign election, but the majority of these -- this impact is going to be 60 days before. That means, as we say, starting next week, some of it -- the rest, it's just the traditional robust April that is preparing, let's say, for the summer. So April, May and June are normally very good months for occupancy. Also, what we have to say is that in general, second semester is the stronger than the first one. And once you go by the first 2 weeks of January and then something around the Easter week, then everything returns to normal. And we are happy to see the results that we're having on April.

[Operator]

[Operator Instructions] The next question comes from Pablo Ordóñez with Itaú.

[Pablo Ordóñez, analyst]

My question is regarding the tariff. You were very successful with your yield management strategy in the past 18 months. What should we expect for the tariff growth this year?

[Paul Márquez, executive]

Pablo, this is Paul Smith. Thank you for your question. As we have given guidance before, we still expect to have 200 basis points above inflation in RevPAR. If you noted, we -- for the overall portfolio, we increased 700 basis points in RevPAR against last quarter. And this is solidly reflecting 200 basis points above the 500 basis points of inflation we have in the same period. So going forward, we continue -- we will continue to see the same trend develop, while we also maximize occupancy.

[Luis Eduardo Barrios Sánchez, executive]

And I would like to add. This thing about yield management and maximizing revenue, really, what's happening is a mixture of many things, obviously, the market, and then the changing culture that we have embarked in the last several years. I think that it's coming to -- not to mature, but we still see a great opportunity to keep on increasing and optimizing, on a property-by-property basis, the yield management. We're using different tools. And we just launched, I think, a new one, which is a very strict measure of the channels of distribution -- the distribution channels by which we use for sale. Today, we are being able to -- we continue to have 80% of our total revenue of reservations come through our own internal proprietary channels. And that's big news because that means that our cost per distribution is kept in the lower range of the cost. And also, it provides those sales to be monitoring where we sell, what we sell, pricing as well as all the reports that we have implemented. So with the trading that we have provided to our managers and with some reshuffling of managers across the platform, we still see opportunity that will come from processes, from people, as well the tools we're using, not only the market.

[Operator]

The next question comes from Alan Macias with Merill Lynch.

[Alan Macias, analyst]

Just one question on competition. Have you seen investment decrease in your segment by international players coming into Mexico or not? What is your -- what are you seeing in terms of competition?

[Paul Márquez, executive]

Alan, this is Paul Smith. Thank you for your question. If we follow up on the announcement, in terms of development, that most competitors have done so far, we haven't seen any reduction in those trends or in those communications. So that would indicate that, no, that they haven't stopped also their development networks. And I believe that this is also going to be supported long term by the same trends in the market. We are now, I guess, accumulating the place we have in terms of tourism worldwide. And we have seen that Mexico is strongly rising to those ranks, and this is also based on both the domestic and the foreign tourism coming -- moving around the country. So we're very happy to see those trends as well. And our competitors are also seeing those trends. So that's what's bolstering their investment pipeline.

[Luis Eduardo Barrios Sánchez, executive]

Now most of the investments we've seen, it is going to the result with, yes, somehow, they're going into the provinces where we are located. However, the maximum announcement we've heard last week is that there was a change in the budget segment, announcing that we're going to open 3 properties this year. And they were going to reach 20 by the end of the year. And that's been their development in the last 15 years. So yes, there is still interest in the segment. But I think we are commanding that growth. And something else, we've seen a very important change in City Express compared to those budget change and is that we are now making -- redoing or revising our branding for each of the 4 brands that we have filed, including City Centro. But the ones that operate under the City Express name. And we're doing an exercise, and you will see that now we are not only appealing to the practical issues of traveling in the business segment at this price point, we will begin introducing some changes on the emotional side of the consumer. That is by beating a little bit our F&B service without increased -- increasing costs. We're just, again, trying to provide a little bit more quality that becomes a strong catalyst of additional service and appealing to that emotional side of the consumer, with a little bit more services trying to adapt the experience to the lifestyle of our consumer. And where we have tested this trust, it is -- it has been very satisfactory how the customer immediately reacts to it. So I think that we are kind of separating a little bit from the pack, not necessarily because of the price and practicality of the product, but also on the emotional and more quality -- on the quality side.

[Operator]

[Operator Instructions] We have our next question from Armando Rodriguez with Signum Research.

[Armando Rodriguez, analyst]

Well, my question, it's regarding the behavior between the leisure travelers and the business travelers since you implemented in your new platform. My question is, is this -- if those groups have different behavior since this implementation?

[Paul Márquez, executive]

Thank you very much for the question, Armando. Yes, we have seen an increase, and we have sustained that increase in the leisure side of things. We have done this by actively promoting groups, also focusing on events, making sure that we have an offer for those events, which can be, for example, religious, weddings, sporting events and so on. And that's what we thought. We have seen higher occupancy levels in our shoulders, which is basically the weekend. We have continued to ramp up those efforts. Currently, about 13% of our occupancy comes from that segment that, as you know, behaves differently from the pure business sector. But we're finding good response to the quality of the product, the attractiveness of the pricing and also the fact that we have now, as Luis mentioned, starting to connect what the emotional level with those segments and making sure that we have an attractive offer for their needs.

[Operator]

This concludes our question-and-answer session. I would now like to turn the conference back over to Luis Barrios for any closing remarks.

[Luis Eduardo Barrios Sánchez, executive]

Okay. Well, thank you very much, you all, for the -- for spending this half-hour with us. We will -- as you know, we have our own information already in our website, and all the financial team is willing to answer and receive any questions in the days to come. Thank you so much, and good day.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.