Hoteles City Express SAB de CV

BMV:HCITY

Earnings Call Transcript 2019-Q1

[Operator]

Good day, and welcome to the Hoteles City Express First Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note your event is being recorded. I would like to now turn the conference over to Ivan Peill from InspIR Group Investor Relations. Please go ahead.

[Ivan Peill]

Thank you, Jake, and good morning, everyone. Hoteles City Express' first quarter 2019 results were released yesterday after the market closed. The company's earnings release can be found on Hoteles City Express' 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 report for guidance on this matter.

Joining us on today's call are Mr. Luis Barrios, Chief Executive Officer of Hoteles City Express; Mr. Paul Smith, Chief Financial Officer; and Mr. Santiago Mayoral, Investor Relations Vice President. Mr. Barrios will begin with some opening remarks followed by Mr. Smith, who will discuss the company's financial results. We'll then open the call for your questions.

Now it's my pleasure to turn the call over to Mr. Barrios.

[Luis Eduardo Barrios Sánchez, executive]

Thank you, Ivan. Well, good morning, everyone, and thank you for joining us to discuss Hoteles City Express' first quarter results for 2019.

Our results this quarter reflect a defensive operation in a tough environment, especially for the first 45 days of 2019. Pressured by a slower-than-anticipated start of the business cycle and by specific factors impacting business travels such as the fuel shortages, the travel deferments for government officials, the laying off of significant number of employees at the end of 2018 as well as temporary delays in local investments, our portfolio faced a complex demand dynamic during the quarter, which translated into softer-than-anticipated results.

Neutralizing the previously mentioned fact, softness in demand experienced at the beginning of the year was contracted by a trend reversal in the latter half of February and in March, practically closing the gap on year-over-year RevPAR growth for this period and extending this performance up to date. In addition, our geographically diversified property portfolio again played an important role during this quarter.

The economies in regions such as metropolitan markets like Mexico City, Guadalajara and Monterrey; secondary cities in the north of Mexico such as Tijuana, Ciudad Juárez, Mexicali and Tampico supported our results and provided a counterbalance to negative performance in the Bajío. Excluding these sample of hotels from our established hotels performance, RevPAR growth for the chain would have registered positive growth during the first quarter of 2019.

Given the turnaround and our conviction that demand softness was an isolated event focused on certain markets rather than a systemic dynamic, we expect our performance to continue improving during the second quarter and in subsequent quarters to finally compensate for the first quarter and reach our RevPAR growth targets by year-end.

Regarding our commercial efforts. In February 2019, we have relaunched our City Express Plus brand, a brand that allows us to provide incremental returns to our portfolio by charging higher ADRs via addressing an upper scale segment of travelers. City Express Plus hotels have an avant-garde design, premium locations and services that allow us to compete with upper scale hotels whilst maintaining our price value relationship maximization of our DNA.

This year's development pipeline has a greater proportion of Plus properties, which in addition to generate high returns tend to diversify our risk.

Over the past 12 months, we added more than 1,500 rooms to our inventory of 50 -- 151 hotels. We believe this inventory is sufficient to absorb the additional demand that we expect will come over the year. That said, we will proceed cautiously with our development plan to open another 14 properties, in addition to the 3 that we have already opened this year. We have not seen any competitive activity that would indicate that the current balance between demand and supply could shift from this positive trend we have had over the past last years. That said, we continue to see attractive growth opportunities in different markets.

Paul will provide more details about our first quarter financial and operating results. But before I turn the call over to him, I would like to emphasize that we have considerable experience navigating difficult and complex economic and market conditions. This included the aftermath of 2018 -- of the 2008 financial crisis and the effect of the uncertainty that surrounded the renegotiation of NAFTA last year. Our company's success has always been due to the strength and depth of our management team, our operational agility as well as the diversity of our markets and products. This has always given me the confidence in Hoteles City Express' significant near- and long-term growth potential.

Paul, will you proceed, please?

[Paul Márquez, executive]

Thank you, Luis, and good day to all of you on the call. My remarks are based on Hoteles' first quarter 2019 financial results, which were prepared under IFRS.

At the end of the quarter, we were operating 150 hotels, 13 more than last year's comparable quarter. Of these, 106 are established hotels, while the remainder have been in operation for less than 36 months. As Luis stated earlier, the numbers of installed rooms increased just over 10% during the quarter to nearly 1.5 million rooms.

In addition to the market conditions that we described, the expansion of our inventory partially contributed to 491 point decline in occupancy. But as we also noted, consolidated occupancy improved to around 60% in March and this level has been sustained thus far in April. It is worth noting that the strength of our established hotel portfolio was demonstrated by outperforming the chain-wide results.

On a positive note, despite the tough demand dynamic and complex economic environment in certain regions of Mexico, through our price management efforts and commercial agility, we were able to increase ADR nearly 4% in the quarter.

Consolidated sales increased 4.5% during the quarter to MXN 717 million, mainly due to an increase in installed room nights related to hotel openings. Our hotel administration sales grew just over 2% to MXN 191 million. It is important to mention that the benefits of our operating platform this quarter were limited by certain seasonal effects in the collection of fees for the supervision and development of new hotels. However, as the year progresses, these benefits should normalize.

Our operating cost and expenses were roughly in line with the increase in the number of installed room nights, increasing just over 12% in the quarter to MXN 606 million. Administrative and sales expenses were MXN 124 million, an increase of a little more than 13% year-over-year. Operating margin decreased 568 basis points to 15%, while our adjusted EBITDA declined 451 basis points to 30.6%. For the quarter, our company's quarterly bottom line was MXN 288,000.

As all of you know, IFRS 16 became effective at the beginning of this year. In applying the accounting rules and the released new reporting standards, we now report EBITDA and adjusted EBITDA in a manner that proportionally recognizes, as a cost benefit, the effect of capitalizing these as well as the corresponding increase in depreciation expense as applicable. These effects are consolidated in the operating costs and expenses of operating hotels and depreciation expenses, respectively.

Net financial expenses increased 35% year-over-year to MXN 107.7 million in the first quarter due to disbursements of bank financing lines in line -- in the last 12 months for the construction of hotels and also due to higher interest rates. Currently, 65% of our debt is hedged at very competitive rates.

On another note related to IFRS 16, net financing costs now recognize that the proportional effect of capitalizing leases as an incremental cost in interest paid, with this effect being recorded in the interest paid. For the quarter, we reported a noncash net foreign exchange loss of MXN 4 million related to the valuation of equity interest in our subsidiaries in Chile and Colombia. It is important to mention that this line does not include any cash outflow as it is only a virtual expense regarding depreciation of foreign assets against the foreign exchange.

By the end of the first quarter, cash and cash equivalents increases over 12% to MXN 938 million. Currently, net debt-to-EBITDA stands at 3.6x. As we have previously communicated, we are comfortable with the range of 3.5x within a margin of more or less 0.3x. As our funding needs have been met for 2019, we expect that this ratio to fall below 3.5x by the end of the year. At the consolidated level, debt represented 31% of our total assets.

During the quarter, we invested close to MXN 300 million under our 2019 development plan, which calls for 17 new properties, 3 of which have been completed. In addition to this pipeline, most of our 2020 pipeline of 15 to 20 new properties is already funded.

Regarding our investments. Although we remain comprehensive on the attractiveness of the market our development pipeline is focused on, we have already designed and are going to implement an alternative operating plan emphasizing cash generation if needed.

Thank you for your attention. And operator, please proceed with the Q&A session.

[Operator]

[Operator Instructions] The first question comes from Alan Macias from Bank of America.

[Alan Macias, analyst]

Just one question regarding, I guess, the performance of your portfolio with the Easter effect and if you can just provide more color on the performance in the Bajío region, which you mentioned had some difficult time during the first quarter.

[Paul Márquez, executive]

Thank you very much, Alan. This is Paul Smith. Let me address that question 2 ways. First of all, since the first quarter of 2018, and this is just to illustrate what we have been talking about in terms of the biggest impact we have of the quarter is basically the added capacity we included at the end of last year, which was not necessarily adequately absorbed in the first 45 days of the year. Now to prove this -- or to give you a little bit more context. Since the first quarter of 2018, we have been publishing the statistics for the FSTAY Portfolio. This is an established portfolio of properties that behave pretty much as we'll expect for the sales portfolio.

If you compare the performance of this portfolio against the first quarter of '18, what you would notice is that while the whole chain had a fall in occupancy of about 450 basis points, we only had a reduction in occupancy here of 230 basis points. Moreover, if you look at the ADR increase, you will see that this portfolio actually increased its ADR to 465 basis points. And moreover, this resulted in an increase of RevPAR of almost 100 basis points. So this is basically just to illustrate that the main -- I guess, the main effect was due to the added capacity and its absorption during the first 45 days of the year.

Now with respect to Easter and what we have been seeing in the Bajío region. First, to Easter, the numbers we have so far, including the Holy Week and, I would say, the first 4 days of the -- of Easter, were trending very positively against last year, a little bit above the results of last year, even though obviously it's not comparable in terms of the date and even though our properties are not necessarily designed as vacation centers, as you already know, this is mostly for business-like tourists. So even with those 2 caveats, we're seeing really, really good numbers for -- better numbers, actually, than the comparable Easter and Holy Weeks of last year. So we -- this is what -- we don't anticipate that this will have a meaningful impact in our second quarter numbers.

And regarding the Bajío question, we started seeing a pickup in manufacturing activity, in particular the -- one of the concerns was that, that we still have is basically the Irapuato, Salamanca and Celaya regions. In those 3 places, the issues with security is on, have persisted but with a lesser impact than the ones we saw in the first quarter.

[Operator]

[Operator Instructions] This concludes our question-and-answer session. I would like to now turn the conference call back over to Mr. Barrios for any closing remarks.

[Luis Eduardo Barrios Sánchez, executive]

Thank you again for joining us today. We remain confident in our potential to capitalize on Mexico's significant growth opportunities as well as our benefit to navigate any challenges that periodically arise. Based on our performance in the second half of the quarter and thus far this month, we are cautiously optimistic about the rest of the year.

We look forward to talking with you on our next quarterly call. In the meantime, our financial and investor relations team are available to answer any other questions you might have about our financial and operating results. We wish you a good day.

[Operator]

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