Hoteles City Express SAB de CV

BMV:HCITY

Earnings Call Transcript 2022-Q2

[Operator]

Good morning, everyone, and welcome to Hoteles City Express' Second Quarter 2022 Earnings Conference Call. Thank you for joining us today.

For opening remarks and introductions, I'd like to turn the floor 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 second quarter 2022 results were released yesterday after market closed. They are available on Hoteles City Express Investor Relations website.

We want 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 report for guidance on this matter.

Joining us on today's call are: Mr. Luis Barrios, our CEO; Mr. Santiago Parra, our CFO. Luis will begin with some opening remarks followed by Santiago, 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. Good morning, everyone, and thank you for joining us today to present City Express' second quarter results for the year 2022. We are pleased with this quarter's results. Our portfolio has continued to prove its resilience and the chain has continued to be recognized as a reliable brand by business and leisure travelers alike. As the year progressed, we continued showing sustained growth on a quarter-on-quarter basis. This quarter, the world saw a slight resurgence of COVID-19 cases. However, these factors did not have a major impact on consumer behavior and tourism in Mexico, continues to perform very well. As it currently ranked second behind Turkey in terms of international tourism recovery according to the World Tourism Organization.

As you all may know, inflation is now at its biggest level in the past 2 decades, which has increased the global prices for materials and manufactured goods. And in response, central banks have tightened monetary policy by increasing the reference interest rates. We see this rising inflation and the Central Bank and government's response as one of the biggest challenges for the chain looking ahead. Thus, we will continue to focus on opportunity of increasing our average daily rate to offset the effects of inflation and alleviating balance sheet pressure by funding better terms and conditions for our bank loans. We will seek to move forward in discussions with our bank creditors to renegotiate our current conditions as we speak.

Regarding ADR and inflation, we expect to end the year having increased rates beyond current inflation levels. In the second quarter, rates in April and May grew 8% versus 2019, while June grew by 11% versus the same year. We also observed a positive recovery trend in occupancy and rate levels in the quarter. In April, for example, occupancy reached 54.2% and 94% recovery, while May and June levels stood at 53.9% and 55.1%, correspondingly, showing a recovery of 91% and 94%, respectively. The latter led to a RevPAR of MXN 599, a 101% recovery during the quarter when compared to the same quarter of 2019.

We have also continued to perform hotel-by-hotel price elasticity exercises involving certain properties where we see the greatest commercial and revenue opportunities. This has helped us to counteract inflation increases and reach a competitive daily rate for our operations. In this regard, we believe there is still opportunity for rate improvement in the second half of the year as demand continues to strengthen. Along with this, we also have to continue to understand and adapt to evolving guest trends in new market segments and regions. We generated different distribution channels and design, different marketing strategies that broaden our reach towards potential clients and other demand buckets. In this regard, leisure travelers have become important customers for all our brands.

Thanks to a strategy we carried out to attract greater demand in this segment, we continue to improve weekend and holiday occupancies and rates. For example, weekend rates are now 6% higher than the weekly average, demonstrating that our service, each brand's unique attributes, coverage and locations are increasingly valued by the leisure markets. This quarter, occupancy rates were much more even across regions than in previous quarters, and all regions came in above our estimates. The Northwest, Northeast, Southeast and LatAm regions are now all above 2019 occupation rates. Additionally, Mexico's manufacturing and export sectors are doing well and are demonstrating the importance of the U.S.-Mexico relationship and the increasing near-shoring trend to the economy's strength and stability.

We have also seen greater dynamism from business travelers resulting mainly from increased activity and travel by large corporations in metropolitan areas. We expect these trends and business traveler's reliance on City Express to continue growing throughout the second half of the year. In addition, we have seen less dependence on OTAs due to our own channels gaining more ground in the second quarter.

The Bajio region, which has been lagging more than other regions due to automotive supply chain disruptions, has begun to recover. Additionally, recent vehicle production announcements from major automakers, such as Ford, Tesla, GM and BMW in the region has made us increasingly optimistic. We have identified 25 hotels in and around the Bajio region that should benefit from recovery in this sector, which would potentially add 3 percentage points to overall occupancy of the portfolio once stabilized.

Given the improvement in our operating figures, process automation, cost control efforts and the ongoing recovery, we continue to achieve greater operating leverage and margins at the chain level. Despite inflationary pressures and higher energy cost, same-store gross operating profit margins remain at very similar margin levels compared to 2019. This is 36.5% versus 36.9% in 2019.

Looking ahead, undoubtedly, one of our most relevant topics we're working on is our balance sheet structure and liquidity. In a year-to-year comparison, we have reduced our debt 11%, and we have continued to invest in maintenance CapEx in properties where the market deserves. Since the beginning of the year, we have reduced our nonproductive assets in more than MXN 200 million as the company's occupancy and cash flow continue to improve, we will continue to add additional rooms to our portfolio.

All our liquidity strategies have been executed during the past months, led to 2x increase in net cash flow and operating activities compared to the same quarter of the previous year. As we have mentioned before, Hoteles City Express is committed to continue improving its capital structure by seeking to consolidate loans, get better rates and terms to alleviate short-term debt pressures. This quarter, the ICBC Bank joined us in syndicated loan. Santiago will cover this in more detail on in his section, along with further updates on our financial and liquidity strategy.

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

[Santiago Parra, executive]

Thank you, Luis. My remarks will be based on Hoteles City Express' second quarter 2022 financial results, which were prepared under IFRS.

Our portfolio closed the quarter with 153 total hotels, the same number of hotels year-over-year. Of these, 145 were considered established properties, 11 more than the second quarter of 2021. The chain operated a total of 17,478 rooms in the quarter, a 0.2% increase year-on-year. Despite the headwinds of the pandemic, during the last year, we managed to open 268 additional rooms.

At the chain level, our ADR increased 10.3% year-on-year to MXN 1,102 and the occupancy rate increased 16.4 percentage points to reach 54.4% over the same period. With both factors combined, RevPAR increased 57.8% year-on-year, closing off the quarter at MXN 599. Local commercial agreements have helped diversify demand and month after month the RevPAR gap narrowed versus 2019, which, as previously mentioned, we consider a stable comparison year. Importantly, in June, RevPAR was above 2019 levels with 105% recovery at MXN 611. We believe the improvement in rates can continue during the second half of this year.

Revenues reached MXN 780.6 million for the quarter. This implies a 50.4% year-on-year increase. The positive trend in the recovery of occupancy and rate levels continue, and the company expects to maintain this growth trend as additional sectors of the economy reactivate. The average daily rate for June was MXN 1,108. Total costs for the quarter increased 26.8% year-on-year to MXN 683.7 million, mainly due to the increase in occupancy, inflationary pressures and higher energy costs. Despite these factors, as Luis mentioned before, same-store gross operating profit margins remained at very similar margin levels compared to 2019, 36.5% versus 36.9% in 2019. We also continue to take advantage of the negotiations with suppliers for discounts on raw materials that are effective until the end of 2022. We'll continue with these and other cost and expense containment efforts, as mentioned in previous quarters to be able to continue delivering higher margins.

Our second quarter adjusted EBITDA was MXN 221.9 million, an increase of 1.25x year-on-year with a margin of 28.4%, 9.4 percentage points above the same quarter of last year. Our comprehensive financing results increased during the quarter to MXN 140.1 million compared to the MXN 112.7 million reported in second quarter 2021. This was primarily due to the higher interest payments on our bank obligations caused by interest rate increases.

At the end of the quarter, 73.1% of our total debt was covered with a derivative instrument, capping the base rate of our loans to a weighted average cost of 10.7%, including a spread of 3.8%. As a result, MXN 3,916.6 million of their debt is hedged against interest rate increases. Our financial liabilities decreased 11% from MXN 6,203.3 million at the end of second quarter '21 to MXN 5,523.4 million in second quarter '22. Cash and cash equivalents decreased to MXN 956.4 million. This was mainly due to cash inflows from the sale of our equity stakes in subsidiaries and the prepayments to the syndicated loan, bringing net debt to MXN 4,567 million. This represented a decrease of 9.5% on a year-on-year basis and 1.5% quarter-on-quarter.

As Luis mentioned before, we continued during the quarter with our deleveraging strategy, analyzing asset recycling options, mainly related to the land bank. Improvements in profitability and the strategies implemented to generate greater liquidity led to 2.6x increase in net cash flow from operating activities compared to the same quarter of previous year. We continue to work on improving our financial structure. We're analyzing alternative valuation proposals to add more value for our investors. We look forward to providing news to the market on this issue soon. In the meantime, the interest rate hedges were -- we previously mentioned, also improved our liquidity position during the quarter. Along with these efforts, the ICBC Bank joined our syndicated loan for a contribution of MXN 288 million. This increased the loans total amount to a little over MXN 3.9 billion. ICBC's entry to the syndicated loan did not change its conditions nor increase the company's total debt.

Our net loss for the quarter was MXN 47.1 million compared to the MXN 135 million loss reported for the same period of last year. This recovery was due to a combination of all the previously mentioned trends and efforts.

In summary, the improvement in hotel demand and reopening of economic activities, combined with our cost and expense containment efforts, refinancing strategies and asset recycling has enabled us to navigate the current market situation successfully and emerge in a much stronger shape. We look forward to continuing delivering on this front for the rest of the year.

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

[Operator]

[Operator Instructions] And ladies and gentlemen, at this time, in showing no questions, I'd like to turn the floor back over to Luis Barrios for any closing remarks.

[Luis Eduardo Barrios Sánchez, executive]

Operator, there is an answer -- a question from Armando Rodriguez from Signum Research.

[Operator]

Yes, sir. We have a late joining participant into the question queue. We have Armando Rodriguez.

[Armando Rodriguez, analyst]

Congratulations on the solid operating results. So my question here is about your forecast in the seasonal effects post pandemic, particularly in the third quarter and what changes that you see, for example, in Semana Santa?

And my main question is, if you are seeing normalizing the seasonally effect pre-pandemic levels at the current year? That's my only question.

[Luis Eduardo Barrios Sánchez, executive]

Armando, this is Luis Barrios. Indeed, the market is beginning to normalize. The seasonality of the Semana Santa last year also fell in the same quarter. It was April instead of late May -- early April rather than late early parts of May. So what we're looking here is, yes, there is a thrust of the -- mostly, in our case, Mexican consumer, it's really traveling much more than they did, and they are probably trying to capture what the time that they didn't travel during the pandemic and even in 2021. We're also -- but this is coupled with the fact that the business traveler that it's our main consumer a little bit more than 50 -- yes, around 60% of total.

What's happening is that, we have felt, since March, the positive trend in terms of the business traveler. And that is something that has to be mentioned here. Make no confusion about the type of traveler that we have. We cater to the traveler that has to travel. And this is the [ warrior ] of the traveler -- of the business traveler, not necessarily the executive guy that it's on the executive suite. So in that regard, we are sensing a more diversified business traveler recuperating their traditional activities.

Coupled with that, we find a more stronger intention to travel in the third quarter for the leisure traveler in July, August. We're also seeing -- beginning to see the appearance on our properties of the traditional key accounts, which these are the larger companies, which are the AAA Mexican companies and the transnational companies that they are -- they were more restrictive in terms of the traveling policies. Now we're beginning to see that.

In the auto sector, as we mentioned, we are also beginning to see investment and reopening of certain -- of more activities in the auto industry. So really, what we're looking at is a growing -- a positive trend that gets reinforced with new players that were refraining traveling as of to the, I would say, first 2 months of the year and then beginning to show a better trend right after March, which is just what we're really having. But these, coupled with the different niche -- market niches that we tried to tackle during the pandemia, and now we're capitalizing on those measures taken since the end of 2020.

[Operator]

[Operator Instructions] And once again, at this time, in showing no additional questions, I'd like to turn the floor back over to management for any closing remarks.

[Luis Eduardo Barrios Sánchez, executive]

Thank you, everyone, for joining today's call. As we have heard and as underlined by our 2022 results, we have successfully turned the corner and I look to a positive second half of 2020 (sic) [ 2022 ]. I want to reiterate how grateful I am to all of you who continue to believe in us and look forward to continue generating value for all our stakeholders. In the meantime, please feel free to reach out if you have any questions or comments. We are always happy to talk to you in the coming days.

[Operator]

Ladies and gentlemen, with that, we will conclude today's conference call and presentation. We thank you for joining. You may now disconnect your lines.