Hoteles City Express SAB de CV

BMV:HCITY

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, and welcome to Hoteles City Express Second Quarter 2020 Earnings Conference Call. Thank you for joining us today. For opening remarks and introductions, I would like to turn the call over to Héctor Vazquez, Investor Relations Director from Hoteles City Express. Please go ahead, sir.

[Héctor Montoya, executive]

Thank you, and good morning, everyone. Hoteles City Express second quarter 2020 results were released yesterday after the market close. They can be found on Hoteles City Express Investor Relations website. We would like to remind you that during this call, management 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 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, Héctor. Good morning, everyone, and thank you for joining us today to discuss Hoteles City Express second quarter results for 2020. We sincerely hope all of you are staying healthy and safe. To start my comments today, I would like to emphasize the results of our pandemic playbook's 3-pronged approach: focus on liquidity and cash preservation, stabilize the operation to the new economic reality and adapt to the new normal customer expectation.

Our liquidity -- on liquidity. We have been able to negotiate amendments to our debt covenants with our creditors, and in consequence, for the long-term debt we have eliminated all potential covenant risks until the fourth quarter of 2021, which shows the solid relationship that we have built over time with financial institutions as well as the trust that they have in Hoteles City Express. We closed the second quarter with a cash balance of MXN 1.4 billion, which we believe should be enough for us to pay all our obligations while the environment normalizes, given that our debt maturities for the most part come due in 2023 and beyond.

On cash preservation, our first goal was to continue operating even under the strictest sanitary conditions while following all rules and regulations imposed by local and federal authorities. We were the only major hotel chain to maintain operations, albeit reduced. We developed the required protocols that went above and beyond other players in the industry, allowing us to become the first hotel chain in Mexico and in the world to obtain the COVIDClean certifications from Safehotels and gain an additional certificate of Safe Travels from the WTTC.

As economic activity restarts, this puts us in a strong place to capture market share and start benefiting from our operating leverage. While this happens, we have also decreased our breakeven occupancy by approximately 6 percentage points to a level close to 24% of occupancy. To achieve this, we'll reach a compensation agreement with all the staff, keeping flexibility to normalize compensation as operations resumes. Additionally, keeping flexibility to normalize compensation as operations resumes and up to 50% on other services suppliers and rent reduction on leased hotels. This has led us to reach near breakeven occupancy in June with a RevPAR of MXN 164. We are expecting to see improvements on cash generation from this point onwards as occupancy and additional hotel openings ramp up gradually.

Moving on to our operations, we believe we have delivered a good quarter considering the environment we have been operating under. Occupancy and rates have behaved in line with our expectations. And financially, we have exceeded our forecast through increased savings. We're seeing occupancy levels above the low average local occupancy in many of our properties, and we believe this will continue to be the case going forward even as our peers catch up. The average daily rate this quarter decreased 11.4% year-on-year. This decline can be explained by a larger participation of City Junior Hotels in our mix as these hotels supported essential sectors, as well as material rate discounts, which were offered to health workers to support several communities in their fight against COVID-19.

In our City Express Hotels, we have experienced less competitive pressures, both on price and copied competition for occupied room nights. After our City Plus Hotels and City Suites regain strength, we would expect the rate decrease to narrow over time. To date, 15 states in Mexico are in the orange phase of the epidemic light system. The manufacturing corridor, the energy corridor and industries that are linked to the United States have been more active than other regions, which is unsurprising. We are expecting to see a slow but steady reopening of the economy as other sectors start to bounce back. Our guests are rightly expecting and requesting strict sanitation and biosafety rules.

We are pleased with the effectiveness of the protocols that we have developed over the past months, which have been recognized both locally and internationally. We have also seen an interesting impact on the way our guests book their room. Direct channels are gaining strength as guests feel more at ease when they see our certifications without intermediaries, supported by a strong communication shift to digital and electronic channels. We are also seeing a preference for budget and economy hotels and domestic travel, mainly by car.

Finally, the use of technology throughout the guest experience has become even more important than it was before, and we are well positioned for this. Today, we can offer our guests the possibility of not interacting directly with anyone throughout their entire stay from check-in to checkout. This is both safer and lowers operating costs. The additional biosecurity measures do not represent a material increase in operating costs.

Looking ahead, we are optimistic with the reactivation and eventual recovery of the hotel sector in this new reality. We believe interesting market share consolidation opportunities lie ahead for hotel chains, which are well-funded. In general, our guests' job content generally do not allow for a home office model, since many of them need to supervise in person manufacturing plants, commercial activities or other operations. We, therefore, would expect to see occupancy bouncing back over the coming quarters. It is important to reinforce the message that, for the time being, we will remain extremely cautious of growth CapEx until we strengthen our balance sheet and gain better visibility of the market. We will continue to work with our franchise and administration agreement for clear growth opportunities.

We're also still very active looking for opportunities that make sense on the asset recycling front. While we are in no hurry to sell assets since we believe we are well-funded, we see some interesting avenues ahead of us. For example, we recently signed an LOI in Colombia, which potentially could lead to something positive for our stakeholders. We will keep our eyes open for alternatives that allow us to strengthen our balance sheet further so we can capture opportunities that make sense in the future.

Finally, as a testament of our commitment with best-in-class sustainability practices, we are pleased to report that yesterday we became the first company in Lat Am to report under the Sustainability Accounting Standards Board System, thus reinforcing our sustainability strategy and enhancing our disclosure of the market regarding our environmental, social and governance progress. Let me finish by saying that we are prepared to deliver for our stakeholders. Our focus and teamwork have put us in a very good position for the reopening phase of this crisis. As said before, we believe the worst is now behind us in the hotel industry in our markets, but remain confident that should progress stall, we will remain vigilant and ready to react. As usual, thanks for your trust and your support.

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

[Paul Márquez, executive]

Thank you, Luis. My remarks here are based on Hoteles City Express second quarter financial results, which were prepared under IFRS. During the second quarter our portfolio decreased by 2 hotels, closing at 152 properties in total, as we permanently closed the City Express Poza Rica Hotel and the expiration of the City Express Tepatitlán Hotel administration and franchise contracts. This is flat against last year comparable quarter. Of the 152 hotels in operation at the end of the quarter, 122 were established properties, 30 more than the second quarter of 2019. We closed the quarter with 17,289 rooms at a 0.4% increase compared to last year's comparable period.

At the chain level, our ADR decreased 11.4% to MXN 896 while RevPAR decreased 81.9%, closing the quarter at MXN 107 as a result of the pandemic. Revenues totaled MXN 147 million, an 81.7% decrease year-on-year. Total costs decreased 37.4% year-on-year to MXN 415 million as we focused on decreasing our breakeven point through negotiations with our suppliers and agreements with our employees. That brings us to our second quarter adjusted EBITDA, which was negative MXN 144 million. Comprehensive financing costs increased MXN 253 million. We drew down on our revolving facilities to ensure our liquidity through the sanitary emergency. Our financial liabilities increased 21.8% year-on-year to MXN 6.5 billion.

Cash and cash equivalents also increased to MXN 1.4 billion, bringing net debt to MXN 5.1 billion; that puts a net debt-to-EBITDA at 9.8x. As Luis said, we believe the worst phase of the sanitary emergency is behind us, and we will therefore expect this metric will improve in coming quarters as our EBITDA generation bounces back, as we are back past our breakeven point. Our net loss for the quarter was MXN 523 million because of all the aforementioned trends combined.

In summary, this quarter was clearly severely impacted by the demand trends from social distancing measures. We expect things will improve slowly but surely in coming quarters. We will remain disciplined with our investments and continue to work on different fronts to maintain our balance sheet liquidity. But we feel comfortable that we have the ability to face all our obligations where we stand.

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

[Operator]

[Operator Instructions] And our first question is from Eduardo Alvizouri from GBM.

[Eduardo Alvizouri Alvarez, analyst]

I have a question regarding the long-term trends. Do you fear that pandemic creates a shift in long-term trends towards the business traveler? I mean there have been many substitutes surging this last few months regarding the business traveler. Conference calls and other resources may substitute this traveling for business.

[Luis Eduardo Barrios Sánchez, executive]

Paul, can you take this [indiscernible] answer? Yes? Okay.

[Paul Márquez, executive]

Thank you for your question. I think it's a crucial one. And it's in the heads of most of the industry specialists. I really believe that changes will be made and changes will -- for the long term. There are short-term changes and then long term, permanent kind of aspects into the industry. What I would say in this regard is that you have to classify or you have to segregate which kind of customer or traveler -- business traveler you're talking to.

I would say that in the high-end properties, especially corporate that can't control their time because they are in higher positions in the corporate world as well as some -- probably some working groups, medium-sized and small, would probably reduce the volume in the longer term. Because these persons control their trips, and they can do and perform their normal tasks through videoconferencing. However, there is another portion of the workforce that it's called somewhat closer to the warrior of the industry or the business traveler. Those are the guys that definitely have to go and visit physically the plants, do sales efforts as well as maintenance, audits and the like.

So you would have to really get into segmenting when you speak about the business traveler. However, you see City Express, normally for the segment, that we are directed and for the kind of rate -- the rate level in which we are, we definitely believe that some portion of the market -- the smaller portion would probably forego the traveling. But most of them, which are the warriors of this world, will continue to travel, and even in the short term as we are looking and seeing and feeling as well as in the long term. So we are most -- we are not necessarily worried about a material shift in the travelers for these kind of segments.

[Eduardo Alvizouri Alvarez, analyst]

Great. And just a quick follow-up. How have you seen occupancy rates during the month of July? I mean you have reopened some hotels.

[Paul Márquez, executive]

We have felt a slight increase. We continue with a positive trend during July.

[Operator]

[Operator Instructions] Our next question is from Froylan Mendez from JPMorgan.

[Fernando Froylan Mendez Solther, analyst]

I have 2 questions, if I may. So Luis, any particular corridor or segment that you would be willing to reduce your exposure? And secondly, ADR declines have definitely been larger in other countries and even versus your own peers here in Mexico in the -- during the pandemic-impacted quarter, that is basically the second quarter and mainly April. But given the limited occupancy during the quarter, should we see additional pressure on ADR in the coming quarters now that you have a larger base of hotels, especially the urban hotels?

[Luis Eduardo Barrios Sánchez, executive]

No. In fact, the reason why we have lower [indiscernible] is that we have -- we used -- we have in the mix of the sales mix for this quarter. We have quite a few -- I mean, quite an amount of City Express Juniors, which naturally have a lower rate. So it's not a matter of pressure in the rate. It's just that the mix of product that we sold was more on the lower end of the rate scale. And in addition, we service the several communities supplying or permitting to receive guests from the medical staff, and we were helping the staff and the communities to receive those doctors at a lower rate in the City Express Junior. So it was more of the kind of demand that [ he ] generated and the support we wanted to give to the communities.

Now once our product of a bit more urban hotels start to reopen, you'll find that City Express' Plus running a better rate. Now this is not a market. That is our perception and an 11% reduction versus the competition, I guess, it's a very small amount compared to what the rest are doing. We are -- we believe that this is a market in which people are buying value and service, not necessarily rates. The people that have to travel under these circumstances are not paying attention to rate. They are paying attention to the perception of risk by staying in your property. And in this case, we have done a magnificent work by having one of the best, if not the best, protocols installed in all the properties.

And this was also possible because we did not close all our properties during the year -- during this period. We remained opening most of them, operating at minimum capacity, but at least we were able to train and introduce all these protocols seamless as we were going along through the crisis. Now in regards to the first question, whether we are going to reduce some presence in certain markets. It's a difficult one to answer at this point in time. It's difficult to forecast what would really happen with certain portions or certain regions, especially when you have a light system which comes back and forth. So I would be more comfortable to answer you to that question in the coming quarters, not now.

[Fernando Froylan Mendez Solther, analyst]

Okay. And if I may follow-up, please. So to understand correctly. So you're not really foreseeing any, let's say, pressure -- fundamental pressure on ADRs coming from this situation. I mean if we saw -- if we would just take a look at same -- one hotel that was closed during the pandemic and will be reopened after the pandemic, despite it's a Junior or whatever type of -- kind of hotel. So you don't see ADRs coming down despite the pressure on occupancies on a same store, let's say, basis?

[Luis Eduardo Barrios Sánchez, executive]

Again, I would -- we are -- you have to understand that we're operating on a daily basis. There is nothing written in this book today that could provide you with an assurance that things would not change in the near term. But at this point in time, it's been more of the product mix, the reduction in rates than really a pressure in the market for a reduction of rates. Now as hotels of other chains start to reopen, well, they would probably start setting the pace and probably there might be some rule changes in competition if they start reducing the rates. But at this point in time, demand -- the people that are traveling are not necessarily looking for a reduction in rate. They're looking for value of the product that they are receiving.

[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. I would like to end this call by [ reiterating ] that we're well positioned on what lies ahead. We are very proud of our team. As thanks to them, we're in a good place to bounce back from this pandemic. We look forward to talking to you in our next earnings call. And as usual, please feel free to reach out if you have any questions or comments in the meantime. We will be more happy -- more than happy to hear from you. Thank you so much. Take care.

[Operator]

Thank you so much for joining. You may now disconnect your lines. Have a good day.