Hoteles City Express SAB de CV

BMV:HCITY

Earnings Call Transcript 2018-Q3

[Operator]

Good morning, and welcome to the Hoteles City Express Third Quarter 2018 Earnings Conference Call. [Operator Instructions] Please note, your event is being recorded.

I would now like to turn the conference over to [ Ivan Peel ] from InspIR Group, Investor Relations. Please go ahead.

[Unknown Executive]

Thank you, Debbie, and good morning, everyone.

[Luis Eduardo Barrios Sánchez, executive]

Hello?

[Unknown Executive]

Is the line still open, Debbie?

[Luis Eduardo Barrios Sánchez, executive]

Yes or at least the...

[Operator]

Yes, yes. The line is open. I apologize.

[Unknown Executive]

Okay. Thanks, Debbie. All right. Good morning, everyone. Hoteles City Express' third quarter 2018 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 reports 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; Mr. Santiago Parra, Corporate Finance Director; and Mr. Santiago Mayoral, Investor Relations Vice President.

Mr. Barrios will begin with some opening remarks, followed by Mr. Smith, who will present 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. Thank you all, and good morning, anyone -- everyone, and thanks for joining us to discuss Hoteles City Express' third quarter results.

Against the backdrop, the backdrop of a Mexican economy that is growing moderately but steadily and which has a more favorable outlook given the recently signed USMCA agreement and the orderly transition between the current and new administration, Hoteles City achieved another quarter of robust operational and financial performance on all fronts. Thanks to our company's presence in markets with above-average growth, exceptional locations and defensive performance in volatile environments, we registered healthy performance strength across our portfolio. This favorable evolution of the Mexico's northern zone stands out as well as the market dynamics in locations with good exposure to services and commercial activity, primarily in metropolitan areas. The negative weight of the energy corridor seems to have completely reversed, building on our portfolio growth, registering a RevPAR increase of more than 20%, driven by both occupancy and ADR.

At the operational level, we maintained our RevPAR growth target above inflation, with an increase of 5.4% compared to the same quarter of last year. On either side, our established hotels, those with at least 36 months in operation, reported occupancy levels close to 65% at the end of the quarter along with a very healthy ADR growth of 4.6%. As we anticipated, the softness in this particular portfolio during previous quarter has dissipated and the specific market dynamics that caused it to have reverted in more than proportional manner.

From a financial perspective, our emphasis on growing rapidly with high levels of profitability allowed us to generate a double-digit increase in total revenue and EBITDA, posting growth levels of 15.5% and 18%, respectively. The operating leverage of our company generates not only healthy expansion dynamics but also a solid counterweight to increases in certain hotel operating costs, mainly higher energy costs that impacted the hotel industry during the quarter. Costs that we expect to neutralize over the next 12 months, thanks to the successful closing of a power purchase agreement that we announced a couple of weeks ago, we believe this will provide even more room for margins to continue expanding over the future.

Regarding our development plan, our goal of opening 18 properties in 2018 remains intact. 5 properties have already been opened. 4 more will open in October and 9 will be in operations from November to March 2019. With sufficient resources to fund our growth, more than 35 projects in development and more than 70 strategic locations identified as of today, we see a robust development pipeline and more than 70 strategic locations will be then developed during 2019 and 2020.

We are contemplating the opening of between 15 and 20 additional properties in each of those years as we continue to see healthy ROICs, achievements by hotels that achieved stabilization and supported by good market trends for our defensive product. Our greenfield investment thesis remain a key part of our success as we look toward our goal of 12 to 14 ROICs at stabilization.

On the technological side of our business, we continue to exploit our proprietary innovative platforms based on information power and databases we have at hand. Yield management was just the beginning of our strategy, and now we are now progressing into other parts of the business. Increase in targeted distribution, cost optimization and future development performance prediction are just some of the tools that we are allowing our strategy to continue to bear fruit. Together with our contract transformation, the empowerment process -- processes -- across this organization, a matrix organization and gradual absorption of our inverted pyramid strategy, we remain fully committed to support the front line with productive tools that will significantly boost performance.

Finally, looking at the investment opportunity that HCE represents today, we believe the company has significant potential for appreciation in value, giving a robust and profitable growth and the scale we have reached compared to the size of our business at the time of the IPO. Over the last 5 years, our company has more than tripled in size in terms of EBITDA as it has passed on a last 12 months' metric from MXN 300 million to more than MXN 1 billion. We will continue to work diligently to realize the true value of City Express hotels, aiming to produce record results quarter-by-quarter that exceed market expectations and our own.

Thank you for your trust in Hoteles City. Now I would like to pass the word to Mr. Paul Smith, CFO of City.

[Paul Márquez, executive]

Thank you, Luis, and hello, everyone. My comments are based on our third quarter 2018 results, which were under IFRS.

At the end of the third quarter, Hoteles City Express had 139 hotels, with 15,700 rooms in operation, an additional 9 hotels as compared to the same period in 2017. Additionally, just after the quarter-end, we opened an additional hotel, the City Express Plus Cancún Airport Hotel.

Occupied room nights increased by 9.6% year-on-year to 896,000 while installed room nights rose by 9.39% year-on-year to 1.44 million. Our chain-wide occupancy rate registered 62.2% and ADR increased by 5.2%, which resulted in the quarter's RevPAR rising to MXN 599 or 5.4% year-on-year.

We are pleased to report that given the actions we took to improve occupancy at the properties that softened in the second quarter, coupled with the robust growth of the remainder of the portfolio thanks to our broad geographic, industrial and business diversification, we were able to grow RevPAR to expected levels above inflation. Of our total hotels, 100 are considered established while 39 are considered nonestablished or those with less than 36 months in operation. RevPAR increased 3% for the established hotels while occupancy posted 64.4%. And just to provide some context, to achieve a 65% occupancy in hotels like ours, our weekends tend to be softer than weekdays, occupancy from Monday to Friday has to be higher than 90%.

On a business segment basis, we continue to see growth with Hotel Operations reporting a 13.1% increase in revenues to MXN 686 million, primarily due to the 9.6% increase in the occupied room nights coupled with the 5.2% increase in ADR. Wholesale administration revenue grew almost 32% with increased pace of activity in Hotel Operations during the peer building and a more robust managed and franchised portfolio of hotels compared to the last years.

Turning to the FSTAY results for the portfolio of 42 hotels, all of which began operating before December 31, 2015, and that demonstrates the characteristics of established hotels. FSTAY occupancy was 65% compared to the 61.6% of the non-FSTAY portfolio, and ADR was 6.5% greater, resulting in a RevPAR of MXN 662 compared to the MXN 580 of the non-FSTAY portfolio.

The adjusted EBITDA margin was favorable on a consecutive quarter basis at 36.3% and higher than that of the company overall. ROIC of this portfolio posted a 12% on the third quarter of the year. This metric represents the potential return of the full portfolio on a stabilized basis.

In accordance with IFRS, our quarterly consolidated revenues came in at MXN 741 million, a 15.5% increase from the year earlier, a result of our increased portfolio with 9 new hotels contributing to total installed room nights. Additionally, we are seeing better optimization of pricing strategies from our efforts to further empower our operating managers. Operating costs and expenses increased essentially in line with our total revenue growth, while the revenue growth in administration and sales expenses were slightly more than half the growth rate of the revenues from the total platform of the company, demonstrating the built-in leverage from scale effect in our business model. Operating income grew 20.8% to MXN 164.2 million while adjusted EBITDA rose 16.4% to MXN 259.9 million. Both operating income and adjusted EBITDA continued to outpace revenue growth. Adjusted EBITDA margin came in at 35.1%.

Net financial expenses grew to MXN 92.24 million due to the disbursement of credit lines for hotel construction, lower cash balances and an increase in the cost of financing as interest rates increased. Particularly, this quarter, the company incurred a one-off financial cost related to the issues of the lines that were executed to secure the 2019 and 2020 pipeline as an asset recycle mechanism for the FSTAY Portfolio.

It is important to note that our financial costs reflect the guaranteed funding for our pipeline of more than 50 additional properties that will be opened over the next 30 months and that the incremental financial costs will be amortized as the properties begin operations. This said, we contemplated that thanks to our significantly efficient lending costs, which are stated at p.a. max 1.6% and the hedging instrument we currently have for more than 60% of the debt portfolio and at a level of p.a. equal to 7.5, our net financial expenses for the full year will fall within what we anticipated at the beginning of the year.

As a result of these effects, coupled with the noncash losses from the revaluation of our equity in Chile and Colombia as compared to the prior year's third quarter, reported net income decreased -- registered MXN 57.5 million.

Regarding the balance sheet, we had just over MXN 1.2 billion in cash and equivalents at the end of the quarter, as mentioned. Based on the execution of our credit lines securing the 2019 to 2020 pipeline, financial debt net of interest payable increased to 36.6% as compared to the end of 2017, and it was MXN 30.7 million at the end of the quarter. Most of this amount is long-term and in Mexican pesos, with MXN 187 million due within the next 12 months and less than 6% of total debt in Chilean pesos. The company has approximately MXN 2 billion available in lines of credit and retains a very strong balance sheet with a net debt-to-EBITDA ratio of 2.6x at the end of the quarter.

As Luis noted earlier, we're on track to open 8 new hotels. Based on our current view of demand and economic environment, we are planning to open another 15 to 20 hotels for the 2019 and the same number for 2020.

Thank you for your attention. Operator, we can start the Q&A.

[Operator]

[Operator Instructions] The first question comes from Alan Macias with Merrill Lynch.

[Alan Macias, analyst]

I just have 2 questions. The first one is just a clarification. You're expecting to open 4 more hotels during the rest of this year. Is that correct? And the second question is on your power purchase agreement. When will this begin to take effect? And what percentage of your costs are electricity?

[Paul Márquez, executive]

Thank you, Alan. So on the first question, we anticipate to open another 4 properties in October and 5 more from here until March 2019.

[Luis Eduardo Barrios Sánchez, executive]

9 more.

[Paul Márquez, executive]

9 more, I'm sorry. Nine more. And Alan, just to give you some context on that, those are really advanced properties. So we foresee no problem in concluding those -- that pipeline in time from what I just mentioned. And I'm sorry, Alan, the second question on the PPA. The -- so essentially what we did is that we secured a contract under the previous law. So this has significant advantage in terms of the cost of distributing the energy, and it's basically a fixed price in pesos that is indexed to inflation. If you were to compare current prices to what's there, you basically get a 30% reduction in savings. And more importantly, with that, we basically eliminate most of our carbon footprint that remains for our very efficient buildup structure. And thank you for your question, Alan.

[Operator]

The next question comes from Pablo Ordóñez with Itaú.

[Pablo Ordóñez, analyst]

Also, a follow-up question on the PPA contract. Can you give us some color on what is the electricity target inflation that you're seeing on your portfolio currently? And where would you expect the EBITDA margin once this PPA is fully operating? That's my first question. And the second one is related to your interest expense line. As you mentioned, given the disposed credit of lines from a couple of months ago, your interest expense is higher. Can you give us a sense of where is the recurring level of interest expense that we should expect in the coming quarters?

[Luis Eduardo Barrios Sánchez, executive]

Thank you for your question. This is Luis. I'll take the first part of -- the first question. Let me tell you what's happening in the industry. For many of our competitors that don't have the same design structure and consciousness in self-sustainability, they increase the impact in their P&L. It's been an increase from 4.5% of sales in terms of energy costs up to 6% and 8%. So it's almost a double for them. In our case, our cost has increased only 1 point over sale. So -- and we have been able to cope with that because of the design. The volume of kilowatt hours that we consume per occupied room is much -- is well below of what they normally -- what they have. So that is a great -- and explain our strategy of being very cautious with consumption of energy and kilowatts. So in our case, to answer directly, it's really about that point of impact, that point of sales and impact on the margin. And as you see, even with that increase, our margins have been able to be -- to sustain.

[Paul Márquez, executive]

Thank you, Luis, for that. This is Paul Smith again, and Pablo, thank you for your questions. Going to the financial expense questions. During the quarter, we incurred a one-off financial cost of about MXN 14 million. This comes both from the issues of the lines and also from the prepayment of more expensive lines that were basically liquidated with a new vehicle. And our expectation is that, as I already mentioned, we expect to see that financial expenses for the full year will fall within what we anticipated at the beginning of the year. So we have no expectations to change that. And again, thank you for your questions.

[Operator]

[Operator Instructions] Our next questioner is Marimar Torreblanca from UBS.

[Marimar Torreblanca, analyst]

My question is regarding RevPAR growth. We saw a pretty significant improve in RevPAR growth this quarter versus what you have achieved in the second quarter. And we knew there were some temporary factors there. But what's your expectation for RevPAR for the second -- well, the rest of the year and then for next year?

[Paul Márquez, executive]

Thank you very much for your question, Marimar, and also for taking the call. This, again, is Paul Smith. So we're seeing a very healthy pickup. As we mentioned over the second quarter, we saw that this was more a temporary effect and primarily given the elections and -- basically the last 2 weeks of June. Going forward, what we're seeing is that there's a pickup in confidence. The unemployment remains low. Consumption remains high. We see very strong fundamentals for the economy. We are seeing a strong pickup in economic activity in the northern part of the country, and we see also a pickup in -- and we have asked people in the -- on the industrial side what are their expectations in terms of growth, and they're all seeing a renewed interest in the country basically once the USMCA, NAFTA legacy deal has been renewed. So our expectation is that we will conclude the year anywhere between 100 and 280 points above inflation and the same for next year.

[Santiago Mayoral, executive]

Marimar, this is Santiago Mayoral. Just to complement Paul's comment, I would add that the RevPAR growth that we saw in the third quarter is a reflection of the geographic diversification our portfolio has. So basically, we are exposed to main economic generators across the country, not just a few of them, so that provides a very good shield against specific dynamics of some of the locations.

[Operator]

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Luis Barrios for any closing remarks. Please go ahead.

[Luis Eduardo Barrios Sánchez, executive]

Well, thank you very much for spending the time with us today. As you know, we have all the information already in our website and all the financial Investor Relations teams will be willing to answer and receive any questions in the days to come. Thank you so much, and have a good day.

[Operator]

This concludes our question -- or excuse me, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.