Hoteles City Express SAB de CV

BMV:HCITY

Earnings Call Transcript 2021-Q1

[Operator]

Good morning, and welcome to Hoteles City Express' First Quarter 2021 Earnings Conference Call. Thank you for joining us today. For opening remarks and introductions, I would like to turn the call over to Hector Vazquez, Investor Relations Director from Hoteles City Express. Please go ahead.

[Héctor Montoya, executive]

Thank you, and good morning, everyone. Hoteles City Express first quarter and '21 results were released yesterday after the market closed. They are available on Hoteles City Express Investor Relations website.

We want to remind you that during this call, management's comments may include forward-looking statements. 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 our CEO; Mr. Paul Smith, our CFO; and Mr. Santiago Parra, our Corporate Finance Director.

Luis will begin with some opening remarks followed by Paul, who will present the company's financial results. We will then open the floor for questions.

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

[Luis Eduardo Barrios Sánchez, executive]

Thank you, Hector, and good morning to everyone. Thank you for joining us today to discuss Hoteles City Express' first quarter results for 2021. We hope you and your families are staying safe, and probably vaccinated by this time.

I am happy to start my comments today by saying that given the signs we saw over the past few months on both occupancy and daily rates, we firmly believe the first quarter of '21 marks the beginning of a recovery period for the hotel industry, and more specifically, for our portfolio.

2020 was undoubtedly a terrible year for the tourism industry, and therefore, an inflection year for our business. With that, we changed, adapted to the circumstances, found new and creative ways to capture a more significant share of the market, and now we're coming out strengthened with renewed energy and ready to take advantage of the market. We are starting to achieve the results we know our properties are capable of.

In April, we have reached the highest levels in the past 12 months on our average daily rate, occupancy and hotel profitability. We saw City Express and City Junior as the strongest brand in our portfolio during the first quarter, with occupancy levels in some of our hotels going beyond pre-pandemic levels on certain days and specific regions. Our other brands also made great strides. All 5 brands have maintained their operating figures above breakeven point since last year. And the overall portfolio had days of occupancy rates above 45%. We have seen further movements in April, and we expect May will be even better.

It is worth mentioning that during March, our portfolio generated positive GOP margins around 24%. We understand that Mexico's recovery may be a long unpredictable and inconsistent path in both regionally and by industry. We expect that by the second half of the year, we will be making more progress given the rollout of vaccines globally. This will probably be more visible in urban and metropolitan areas and in the manufacturer and exports corridors where the programs aim. As we started the economy in the U.S., the United States will most likely trickle down through the border where our portfolio has a relevant presence.

We have continued to take advantage of the different openings we have seen in the market to capture new demand. We have done this through innovation, the use of new technologies, our teams empowerment and even the introductions of marketing campaigns to target very specific traveler segments. While we still believe most of our business will continue to focus on domestic business travelers, where we have reinforced our communications efforts to be near, we also see an opportunity to capture demand from the leisure traveler.

We have introduced a new program called City [ Discovery ] to showcase the attributes of the different occasions where our hotels are present and the convenience for family travel. I mentioned that we have strengthened from this very critical period, finding cost efficiencies, we have made permanent over the past few quarters. Our goal has been to increase communication and digitalize all the processes to find much more efficiencies.

We have obtained essential cost reductions and continue to see sequential improvements in our hotel's profitability. We believe that when pre-pandemic demand recovers, we will be able to retain somewhere between 10% to 13% of these cost savings.

Turning to our balance sheet. We are currently analyzing different alternatives to reinforce and restructure our financial situation for the short and long term, the latter should allow us to have a robust liquidity position. We expect to be in the position to provide more clarity on this front during the second quarter of the year. We remain committed to passing our development efforts to preserve liquidity on the deal refinancing is concluded. However, we already have 4 properties ready to open during the next quarters if the market permits. We are also working on several asset recycling operations, and we think we may be able to share positive news in the coming months.

Before I finish, I want to reiterate that our commitment to sustainability is unwavering. We continue to find ways to increase our contributions to sustainable goals, and we are currently working on making our climate change, a strategy much more robust.

This year, we will be -- we will publish our press report on a TCFD analysis without leaving behind the GRI and the SASB indicators. In addition, we have started working with UNICEF to be a part of the Spotlight Initiative in Mexico during 2021. This program is aimed to eradicate violence against women and girls.

Now I would like to hand the call over to our CFO, Paul Smith, who will provide you with further details on our financial and operational performance. Paul, will you please proceed?

[Paul Márquez, executive]

Thank you, Luis. My remarks here are based on Hoteles City Express first quarter 2021 financial results, which were prepared under IFRS. Our portfolio closed the quarter with 153 properties in total. This compares to 154 hotels as of the first quarter of 2020. Of the 153 hotels in operation at the end of the quarter, 133 were considered established properties, 10 more than the first quarter of 2020. We closed the quarter with 17,411 rooms, a 4% -- 0.4% decline year-on-year. The latter is mainly attributed to the expiration of 2 hotel administration of franchise contracts and the permanent closure of City Express Costa Rica.

At the chain level, our ADR decreased 6.1% year-on-year to MXN 962, and the occupancy rate decreased 16.6 percentage points to 30% over the same period. With those impacts combined, RevPAR decreased 38.9% year-on-year, closing the quarter at MXN 289. On a sequential basis, ADR increased 1.4%, and RevPAR increased 1.8%. While the recovery is still nascent, we are encouraged by the continued sequential improvements in our portfolio.

Revenues totaled MXN 390.8 million for the quarter. This implies a 40% year-on-year decrease and a 1% quarter-on-quarter increase. Total cost for the quarter decreased 18.6% year-on-year to MXN 500.1 million as we maintain cost savings agreements with both suppliers and employees. That brings us to our first quarter adjusted EBITDA, which was MXN 10.6 million. This breaks the negative EBITDA period, which we had for 12 months, demonstrating our portfolio has surpassed its breakeven occupancy points.

Comprehensive financing costs decreased 32.8% year-on-year during the quarter to MXN 87.2 million. Our financial liabilities decreased 1.5% quarter-on-quarter to MXN 6.3 billion. Cash-on-cash equivalents also decreased to MXN 869.4 million, bringing net debt to MXN 5.4 billion. This is a 3% sequential increase in our net debt.

Our net loss for the quarter was MXN 199 million because of all the aforementioned trends combined, and this represents an improvement compared to the MXN 337.5 million quarter net loss from the fourth quarter of 2020.

In summary, this quarter showed continued sequential improvements in our operating results, which have surpassed the EBITDA breakeven point. We are optimistic about 2021 as we expect further demand improvements in coming quarters as mobility increases. We will remain very disciplined with our balance sheet as we continue to analyze different strategic alternatives to guarantee the best capital structure we can find for the future of the company.

Thank you for your attention. Operator, please begin the Q&A portion of our call.

[Operator]

[Operator Instructions] The first question is from Jorel Guilloty of Morgan Stanley.

[Wilfredo Guilloty, analyst]

Congratulations on the results. First question is, so we saw that EBITDA was positive for the first time in basically a year, which is clearly a good sign. At the same time, we still see financial expenses ahead of EBITDA. And so I just wanted to get a sense of view of how you see the trajectory going forward in terms of your leverage levels. I mean do you feel comfortable with the leverage as it is with the expectation that EBITDA is going to accelerate materially? Or do you see that you have to engage in some sort of refis or asset sales or something of the sort in order to deal with the leverage levels as it stands today?

And then the second question is around M&A. We're wondering as to what opportunities you're seeing out there in order to consolidate within the space. I imagine that some interesting opportunities have popped up during the crisis, and you guys are obviously an excellent operator. So just wanted to get a sense of where you're see -- where you stand vis-a-vis M&A? Why are you thinking about valuation and the like?

[Paul Márquez, executive]

Thank you very much, Jorel, for your questions. Turning to the first one. We actually see both -- we see that EBITDA has been improving and will continue to improve. Obviously, we were impacted by the second wave of the pandemic that hit Mexico, I would say, from the second week of December until basically February. So that essentially impacted our occupancy for the month of January, also some seasonality impact there. Although actually, I'm really happy to say that the efforts we have made to attract some of that domestic leisure traveler are also very improved.

We actually saw a very strong Holy week. A lot of domestic travelers looking for the best value price alternative for their holidays. And we are actually very, I would say, enthusiastic about that going forward. But let me turn back to the main trends. So what we're seeing, and we're actually monitoring this very closely, is that as mobility continues to increase, we continue to see that being reflected in our occupancy. And obviously, we haven't had to discount like most of the market are ADR.

So what -- what we're very strongly seeing as a driver is a lot of the economic drivers impacting, I would say, mainly right now the export sector is essentially reflecting in occupancy for our hotels. And that occupancy is trickling down to EBITDA, essentially coming also for the adjustments we have made to the cost structure of the company, where we have found that about between 10% to 13% is now permanent. And we're happy to capture those benefits as the recovery is ongoing.

Then to the second part of that first question, we do see that we need to improve the structure of our debt. Essentially, we need to fix, I would say, the position of the revolver we disposed at the beginning of the pandemic last year. We're looking -- most of those resources, as we explained in the fourth quarter, were used essentially to conclude the investments of the pipeline portfolio we had as work in progress. So most of those resources were effectively invested into brand-new hotels.

We're actually -- one of the alternatives we're looking at is using those hotels as the collateral so that we can get a more reasonable term on that debt and then get some leeway on the principal payments that arise from that vehicle. So that's also a component.

And then turning to the second question. We -- what we have seen is that we haven't faced a significant -- and actually, that's -- I would think that's reflected on the lesser decrease in our ADR, vis-a-vis the rest of the industry. We haven't feel the pressure from a competitive perspective in terms of prices. We still see that the customer is valuing more two things: a, the consistency of our performance in terms of the service offering and our bio standard measures that we have implemented, and the consistency that he feels that is protecting his travel.

And secondly, you're right. We are seeing that some of the, I would say, most of the mom-and-pops are not being able to open their channels as efficiently as I would imagine they would. Some of it has to do with lacking of standards. The other one has to do with the lacking of, I would say, digital distribution system that is cost-effective for them. And that essentially is, I would say, limiting their alternatives to capture some of the demand we're seeing in the market.

In terms of consolidation, as soon as we conclude with -- and as Luis mentioned, with the announcement of fixing the balance sheet, we will certainly get on to that because we believe that there are going to be significant opportunities in the market.

[Operator]

Next question comes from Froylan Mendez of JPMorgan.

[Fernando Froylan Mendez Solther, analyst]

Just to clarify a little bit on your specific plans to reduce debt. So if I take the current net debt that you mentioned, Paul, of 5 -- almost MXN 5 billion, and divide it by the 2019 EBITDA, you're at 5.5x leverage. That is -- that compares to 3.5 that you had in 2019, which was like the highest level you had in the past.

So what is the level of leverage that you want to reach in the short term to be able to pick on growth again? And in this sense, will you be willing to issue equity to free up your balance sheet? And if you can specify the size of the asset sale pipeline that you have in mind.

[Paul Márquez, executive]

Thank you very much for your question, Froylan. Turning to the first question. Bear in mind that different from 2019, the number of hotels that I have stabilized is now different. And that has a significant impact on the EBITDA generation of each property. So that's something to be considered. Obviously, we're not talking about comparable periods.

Also, as we explained in 2019, we were very heavily impacted by the gasoline issues we had on the first quarter of 2019. So 2019 was not necessarily a benchmark year for us in terms of EBITDA actually. We were expecting something significantly higher than that. Aside from that, I would say, first quarter mobility issue we have with gasoline supply chain issues in the country.

Now when I do the analysis based on the maturity of the portfolio we have right now under stable conditions, you will see that there's going to be a significant impact from the stabilization of those properties into the leverage ratios. And that's going to make it more sustainable. Now obviously, what you need to focus first is how do you gain the times you need so that, a, things normalize; and b, those properties can actually show the results that they can deliver.

So to do that, part of the focus has been where we can concentrate in both fixing the balance sheet, assuring that we have a debt structure that is consistent with the time we require, both for the recovery and to showcase what I just mentioned. And b, what's then the appropriate leverage ratio. We are obviously exploring many alternatives in terms of the asset recycling as most of the industry -- and you can actually validate it with the rest of the players. The bit -- and as spread for assets of our kind, the market has not returned to something that is normal.

So it's still not necessarily -- or we haven't seen necessarily that, that gap is sufficiently close so that it's attractive in terms of the usage of capital. But we have a couple of structures that are also alternative where -- it doesn't even involve properties that are already concluded, but it actually has to do with some of our land bank. And that would be essentially reflected into a deal where we could actually use that land bank, sell it to a third party and then actually develop those properties, given the location of the land plots where those properties are located. We believe that if we were able to conclude that transaction, one of the alternatives we're reviewing, that will have a significant impact in deleveraging the balance sheet as well, Froylan.

[Fernando Froylan Mendez Solther, analyst]

What could be the potential size of what you're looking to sell at this moment, Paul, just to give us a sense?

[Paul Márquez, executive]

Well, if you look at the land bank, the land bank has a value of about MXN 700-and-something million. And if you are in all of the, I would say, the fees-and-so-on structure, you could actually add to that. That gives you a range. If you subtract that amount from our debt, let's say you were taking out, let's say, MXN 1 billion from our debt structure, you would see that combined with what I just mentioned in terms of stabilization, that will be more or less sufficient to clear the, I would say, excess leverage we currently have.

[Fernando Froylan Mendez Solther, analyst]

So why would be like the goal of leverage that you would expect maybe on 2022, 2023, more around 3.5x again as you did in the past? Or why would be...

[Paul Márquez, executive]

Yes. The company and the Board feels comfortable with a 3.5x net debt-to-EBITDA ratio.

[Fernando Froylan Mendez Solther, analyst]

Okay. Perfect. And if I may just add another question. Could you give us some color as per April dynamics in ADR and occupancy that Luis mentioned a little bit before in his remarks, just to get a sense to where occupancy trending is into the month?

[Paul Márquez, executive]

Absolutely. So one of the things, Froylan, that you have to consider is who's traveling in Mexico right now and who will probably continue to travel in Mexico right now. If you remove -- if you were to remove the portfolio in the metropolitan areas, you would actually see that our ADR is not only sequentially increasing from quarter-to-quarter, but actually year-on-year. So my biggest discount is coming from a mix of properties. The biggest impact of the pandemic, as you probably already know, this happens in the larger cities of Mexico. That comprises about 17% of my portfolio of installed room nights. Most of those installed room nights are actually the plus product, which has an ADR of about MXN 1,100 on average.

So when you have lower occupancies on the larger cities of Mexico, given the restrictions and the mobility issues in the larger cities, what you have is a mix that's actually impacting your average. But when you look at specific dynamics, corridor-by-corridor, you see that in most of my corridors, I'm actually gaining or if you look at -- even if you were looking at brands, if you look at the City Express brand, you will see that the ADR at the City Express brand level is actually increasing. And it's increasing even -- two things as I mentioned: a, the strength of our service offering to the market both consistent with the biosafety [indiscernible] we have implemented and with the distribution that we're actually leveraging upon; and b, the fact that the traveler is very focused on who can provide this service consistently. And nobody has the geographic dispersion that I have in Mexico. So those two things are playing in my favor.

And then in terms of the trends, as Luis mentioned, we're starting to see weekdays of about 40% to 45% occupancy during the month of April. We were actually -- we were somewhat hesitant as to what was going to happen during Holy week, we were actually very happy to see that our portfolio behaves very nicely. Again, capturing a lot of this domestic traveler. We didn't have -- we actually had a nice increase in ADRs for Holy week, even higher than we had anticipated, given the demand we saw. And we're actually pretty happy see that we came ahead of our, I would say, market review settings in terms of RevPAR penetration in the locations where we serve.

[Operator]

[Operator Instructions] The next question is from Armando Rodriguez at Signum.

[Armando Rodriguez, analyst]

The first one is related to your operating expenses reduction. So considering this, if you can give us a little bit more color on your breakeven particularly on the corporate level.

And my second question is on your asset recycling program. Just to clarify if Fibra STAY portfolio, some assets of this portfolio is considered -- are considered in your asset recycling program. That's my only 2 main questions.

[Paul Márquez, executive]

Thank you for your questions. Tending to the first one. We have been disclosing to the market that we took, and I would say, very quickly, very stringent measures to review not only our cost structure, but also the way we do businesses. And we were specifically focusing on what opportunities we have, both on the revenue side and on the expense side to improve those processes, what we could become a digitalized process that didn't require people, where could we find some efficiencies.

And we have implemented essentially two big initiatives that are coming to fruition, and you see the comparison becoming very relevant right now. One comes from the revenue cycle management. We are now, I would say, leveraging very significantly on something we call internally the commission infrastructure. What this is, is a huge advantage, to -- in particular, to our B2B customers that not only require a room with the conditions of the room we offer, but also require the administration of the process for their own ledger accounts and so on.

The commission staff essentially allows any B2B client of ours to do business with us with a single entity. And this takes care of all the account reconciling, all of the revenue reconciling, all of the invoicing and so on with a very, I would say, a very convincing structure that is very easy to use and they can actually be connected through an API through their own ERPs. And we're seeing an advantage there because we were able to optimize our own, I would say, at the opco structure with people that were doing that function manually, and they were essentially reassigned to other functions, both in the hotel or elsewhere.

And then on the, I would say, on the cost structure side, we obviously had an advantage from the increase in productivity that I already mentioned, both at the property and at the management company. But we also saw an advantage in essentially digitalizing our supply chain. And we are now also benefiting from that. Not only have we secured the prices for the things we use for the rest of the year. But also, we essentially assured that we have more agile system for transacting with our suppliers and with our vendors in a more efficient way. It's also more competitive. You could actually do a -- we have a virtual marketplace where new competitors can come in and showcase their product and compete against each other. It's very transparent. So we're also gaining from that.

And that, again, has now been fully digitalized. So it's running automatically. It manages everything from inventory to movement to acceptance of orders and so on. So we're also very happy with the results from that.

Those two are part of the permanent structure of savings we are seeing. The remaining portion comes from simply being very acutely aware of what we're spending at the property level and been very cautious, reviewing every single line, ensuring that it's impacting the right way the customer service and perception and not affecting the value perception they have, but also assuring that we get the highest profitability from every single room we serve. And we're also very happy with the results we have achieved in that regard.

Turning to your second question. No, we are not necessarily considering an opportunity right now for the FSTAY portfolio. As you saw, that portfolio actually behaved very well. We actually published the 2020 statistics for that portfolio. It's about -- it actually managed to get an EBITDA positive of almost 16% last year, which, as you know, none of the other comparable portfolios in Mexico were able to achieve a similar rate of profitability. That fixed volume of both the -- I would say, the performance of a stabilized portfolio and also, some of these metrics implemented in one of the clearly toughest years in the history of this country. So -- but no, we're not considering doing any recycling with that portfolio, but we remain open to alternatives as well.

[Armando Rodriguez, analyst]

Just to confirm that related on the first question. So the breakeven -- operating breakeven on the return at corporate level, it's -- can you tell us what's the range between those levels?

[Paul Márquez, executive]

Sure. At the property level, we see breakeven essentially at the 22% GOP -- I'm sorry, we see breakeven at a GPO level at a 22% occupancy level. And as demonstrated here and also demonstrated in the previous quarter, with a 30% occupancy, you actually also break even at the consolidated level.

[Operator]

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

[Luis Eduardo Barrios Sánchez, executive]

Well, thank you, operator. I feel proud to share with you what our team has delivered in an unthinkable year. I am sure of this success has to do with our corporate culture, which we know as Cultura City. This culture encompasses our team's dedication to deeply understand the markets where we operate to constantly innovate and find ways to improve, adapt when required, and to have a sense of immediate delivery that contributes to achieve our strategic and tactical plans.

I expect further improvements will come over the next 12 months. And I thank you all for -- our stakeholders who have supported us throughout the most difficult months. We look forward to meet you again in our next earnings call. And thanks for your interest in our company. As usual, feel free to reach out if you have any questions or comments. We'll be more than happy to hear from you. Thank you, and good morning.

[Operator]

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

[Paul Márquez, executive]

Thank you, Kate.

[Operator]

You're welcome. Have a nice day, everyone.