Hoteles City Express SAB de CV

BMV:HCITY

Earnings Call Transcript 2020-Q3

[Operator]

Good morning, and welcome to the Hoteles City Express Third 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 for Hoteles City Express. Please go ahead, sir.

[Héctor Montoya, executive]

Thank you, and good morning, everyone. Welcome to Hoteles City Express third quarter fiscal 2020 results were released yesterday at market close. They can be found on those 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 on today's call are Luis Barrios, our CEO; Mr. Paul Smith, our CFO; and Mr. Santiago Gutierrez, our Corporate Finance Director.

We 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 third quarter results for the current year. We hope you all and your loved ones are healthy and well.

To start my comments, I would like to reiterate that we continue to be committed to the strategy outlined earlier this year to guide the company through this health and economic crisis. Having been in this situation for 6 months now, I am very pleased to share that we've reached what seems to be the recovery period in reasonably good shape. Although, we're still facing challenging times, we will continue to act specifically on the fronts we enacted in our short-term strategy that include aggressive marketing, cost controls and special attention to our cash flow and financial structure.

We will continue to act immediately and try to anticipate market changes implementing the necessary adjustments to the organization, products and services, distribution channels and advertising campaigns, as well, health and safety of our stakeholders will remain high in our agenda, supported by our biosafety protocol's robustness.

Moving on to general comments on the quarter. We are already seeing a pickup in demand for hotel rooms across the board. There is [ small ] [indiscernible] in the northern states as well as in the Gulf corridor, where we are operating above our stabilized occupancy levels in many cases. Additionally, we see demand coming from Asian companies, which are following the trend of near-shoring to access the U.S. market and have seen in the market companies from several industries in the early stages of reopening. We closed the third quarter with a 23% occupancy rate on the portfolio, up 12% from second quarter. Resulting from our comments, mentioned in previous paragraph, it's worth mentioning that during October, the positive trend continues, and we have been able to post business day occupancies in the range of 35%.

As I mentioned before, with the attention -- with intention of anticipating to the continuous changes in the market conditions, we have been monitoring the development of COVID-19 pandemic investment trend in Mexico and different mobility indicators that have allowed us to have a better visibility of the short-term occupancy rate performance in each state in which we operate.

We have also seen mobility increasing in the majority of the country, which at a national level, has recovered up to 60% from the pre-pandemic mobility levels.

We are reasonably confident this will translate into higher demand and thus higher occupancy rates for our company in the near future. It is also worth mentioning that there is a positive and strong correlation between mobility indicators and hotel occupancy levels.

During the third quarter, direct channels continue to gain strength with our reservation mix. We witnessed an increase of bookings done through our own reservation channels, where we are now receiving 90% of room reservations versus 80% before pandemic. The latter is spent to reinforcement of the communication strategy within our different marketing campaigns, our wide geographic coverage and the fact that we have kept our properties open throughout the pandemic giving certainty and confidence to the consumer.

Moving on to our financials. During the quarter, we maintained the same control measures we have discussed in the past to preserve the company's liquidity. We still benefit from deferrals of interest and amortization of principal payments as well as from flexibility in our operating costs and expenses given our current occupancy levels. We should be adjusted as our operations normalize.

We were able to achieve positive cash flow generation at the chain level every month of the quarter. In September, we were able to fund our reduced CapEx program and pay our debt amortizations and still had a modest increase in our cash balance for the quarter. We have seen reasonable progress in our asset recycling effort. We finalized the sale of a land plot in Mexico City and have signed a binding promise or repurchase sale agreement of a land plot in Barranquilla, Colombia. Both sales account for MXN 80 million out of the MXN 150 million program we have launched for this year, and we will continue with these efforts going forward. Both sales will be completed above the asset cost.

Let me finish saying that we are pleased with the performance of our portfolio under the strategy we have implemented in this very atypical year to say the least. As a team, we remain highly motivated to continue delivering results for all of our stakeholders and already planning for 2021. We are grateful with our team, our suppliers, our creditors, our investors, who have supported us through this journey, and we intend to keep generating value for them.

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, please proceed with your remarks.

[Paul Márquez, executive]

Thank you, Luis. My remarks here are based on Hoteles City Express third quarter financial results, which were prepared under IFRS. During the third quarter, our portfolio increased by 1 hotel, closing at 153 properties in total. This compares to 151 hotels in the last comparable quarter. Of the 153 hotels in operation at the end of the quarter, 127 were established properties, 12 more than the third quarter of 2019. We closed the quarter with 14,339 established rooms, an 11% increase compared to last year's comparable period.

At the chain level, our ADR decreased 6% to MXN 958, while RevPAR decreased 63.3%, closing the quarter at MXN 219, still seeing the impact of the pandemic. Normally, quarter-on-quarter, our RevPAR increased by more than 2x. Revenues totaled MXN 297 million, a 63.5% decrease year-on-year, but 101% increase quarter-on-quarter. Total costs decreased 30.4% year-on-year to MXN 474 million, as we still maintain cost savings agreements with our suppliers and our employees.

That brings us to our third quarter adjusted EBITDA, which was negative MXN 56 million. Comprehensive financing costs decreased 17 point -- increased 17.5% to MXN 122 million as we drew down on our revolving facilities to ensure our liquidity through the sanitary emergency.

Our financial liabilities increased 22% year-on-year to MXN 6.5 billion and cash and cash equivalents also increased MXN 1.3 billion, bringing net debt to MXN 5.2 billion.

Our net loss for the quarter was $303 million because of all the aforementioned trends combined.

In summary, this quarter was still materially impacted by the pandemic, but we saw an important improvement quarter-on-quarter. We expect the situation will continue to improve in coming quarters. And in the meantime, we will remain disciplined with our investments to maintain liquidity in our balance sheet.

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

[Operator]

[Operator Instructions] And our first question will come from Froylan Mendez with JPMorgan.

[Fernando Froylan Mendez Solther, analyst]

Luis, Paul, Héctor, I have 3 questions, if I may. How much of the occupancy levels reached in October, you think, that are still related to the restrictions in each state? Or in other words, if the restrictions were to be lifted today in every state, would it substantially change your 35% occupancy as of October? That's my first question. Second question, could you explain us the margin difference between a reservation made through own channels versus OTA? Just to understand how much margin are you gaining from reaching 90% of the reservations done by own channels? And lastly, in the past years, we have been thinking about maybe 14 hotels opening per year with a predominantly focus on owned or co-owned assets, which definitely has led to higher leverage. Given the experience we're going through, when do you see Hoteles City focusing 100% on the asset-light side?

[Paul Márquez, executive]

Thank you very much, Froylan, for your questions. Let me address them, and I will allow also Luis if he wants to complement on what I have to say. So on your first question, what we're seeing is a tight correlation between mobility and our occupancy or [indiscernible]. With that regard, I believe that the restrictions do have a significant impact not only on our own activity, but also on the economic activity overall. That being said, if you look at the -- for example, at the top life system that the Mexican government has implemented. It doesn't necessarily correlate with economic activity.

So you have to basically do a case-by-case analysis to get to that question. I would think that if you look at the curves for mobility as an average for the country, what you're seeing is it's an uptick in trend that is assuming if you continue with the same trend that essentially by the first quarter of 2021, you should be free of any impact coming from the pandemic. And if that continues to correlate as it has been with our occupancy, then you should also expect to see some normality in the occupancy levels at that time. Obviously, this doesn't take into account second wave or any other issues that might arise from the changing climate and so on. I don't know if that was clear for the first question.

[Fernando Froylan Mendez Solther, analyst]

Yes, yes, Paul.

[Paul Márquez, executive]

Okay. Secondly, in the second question, the margin change in the versus third party channels. So essentially, you have a mix of -- in our own channels, you have a mix of cost around 6%. And if you look at the -- all of the third parties, including GDS, just said and OTAs and the like, you would have an average cost of about 18%. So that's essentially the difference in cost by using one or the other channel. I would remark that one of the things that we have noticed, and I think we have discussed this privacy, i.e. that the customers are getting more interested in the attributes of your biosafety standards while doing a reservation. And that's also pushing forward the own channel reservations because you get better information by leveraging on those channels. I don't know if that answers your second question as well.

[Fernando Froylan Mendez Solther, analyst]

Yes, yes, it does, Paul.

[Paul Márquez, executive]

And then lastly, with regards to the asset-light question, I think we have mentioned this also in the past. We are focused on doing that. We believe that we have achieved sufficient scale on our asset-heavy side so that as soon as the opportunity arises, we continue to -- with our strategic plan to release the FSTAY model to the market. And thus initiating a switch from asset-heavy to asset light.

Obviously, that will be dependent on the conditions of the equity market. In Mexico or on opportunities that might arise also from the consequences of the pandemic. In the meantime, it should be noted that we have a significant portfolio of openings coming from our branches and managed contracts for the remaining of this year and also for next year as well.

So essentially, we have another 4 projects to be opened next year, all of them under the management and franchise agreement. And we should open another 2 this year still on the first quarter, using a combination of both. One is a co-investment and the other one is a prices and management agreement.

[Fernando Froylan Mendez Solther, analyst]

Perfect. Paul, and if the Fibra STAY vehicle takes longer than expected to be out, is there a way to still make that shift towards more asset-light, maybe even 100% asset-light despite Fibra STAY remains for a longer time within the Hoteles City structure?

[Paul Márquez, executive]

Yes. One of the things that I think that the pandemic will bring is opportunities for consolidation in the industry. And obviously, one of the opportunities that we might leverage on is that consolidation so that we can become asset-light as well. So FSTAY -- all I'm saying is FSTAY is not the only -- it's not the only way to become asset-light. There are a lot of alternatives. And obviously, there's also renewed interest by investors in Mexico, given that majority of them that we have talked to see Mexico as an opportunity right now.

[Operator]

[Operator Instructions] Our next question will come from Jorel Guilloty with Morgan Stanley.

[Wilfredo Guilloty, analyst]

I wanted to pick up on the M&A comments. So we did see that you had an NOI and a sale to the amount of MXN 80 million this past quarter. And I was just wondering if you're seeing an acceleration in terms of bids or people or just interest from abroad and within Mexico? And how is that pricing going, in the sense of like is it basically replacement? Is it above? Basically, just some color on M&A. And then I wanted to also get a sense of the recovery by region. I mean, clearly, occupancy is on the way up. But I wanted to get a sense if there were some regions that outperform vis-à-vis your average and others debt underperformed? And what do you think the drivers are for that?

[Paul Márquez, executive]

Thank you, Jorel, for your questions. To address the first question. As we said during the call, we managed to have a couple of properties sold, both of them were land plots, one in Colombia, the other one in Mexico. Those were sold are above the cost of acquisition of those land plots as we made a profit on the disposition. The usage for both land plots is not necessarily going to be related to hotels. It's going to be other real estate usages for both of them.

We are also seeing interest in a couple of more of the properties we have in Mexico City. And that's why we believe that we will be able to achieve somewhere near MXN 150 million for the year in terms of asset recycling.

The market -- the real estate market in Mexico, I believe, has managed to stabilize. There's still some significant differences in the EBITDA spreads. That being said, we haven't seen pressure for the properties that we are disposing of. They're still very reasonable. And we believe that, that has to do with the location of those properties and with the fact that they are really well located, well communicated assets and also given the fact that we also have most of the licensing required to do the development on them. And that perceived as an advantage right now.

So actually, what we're seeing for the remaining recycling efforts we're going to do this year is that more likely than not, those properties will be developed for hotel use and more likely than not, will also carry our brand. The advantage is that we will not be doing the equity investment into the property or into the development.

But as I said, the EBITDA spreads are still not necessarily have stabilized in Mexico. And I believe that they -- we still have to wait probably all of the fourth quarter to start seeing some more stabilization in those metrics, Jorel. I don't know if that answers your question?

[Wilfredo Guilloty, analyst]

No, that's good color. Yes.

[Paul Márquez, executive]

Okay. And on the second question, we -- as Luis mentioned, we are seeing a significant pickup of activity in the northern region of the country, in particular, in the border on the Pacific. Sequanna is essentially booming right now. And that activity is also pushing forward towards Mexicali and also towards the southern part. We're also seeing a lot of activities throughout [indiscernible]. All of this have to do Jorel with, as Luis mentioned, near-shoring of, I would say, mainly Asian companies coming to Mexico to take advantage of the newly signed time and also avoiding the restrictions of the more structural issues between the U.S. and China.

We're also seeing a pickup in activity in the [ Bajio ] region. The automotive industry is picking up. I'm pretty sure you have seen the reports in the U.S. of both the prices of used cars increasing, given the scarcity and also the depletion of inventories of new vehicles in the U.S., and that's essentially pushing demand also in the manufacturing side in Mexico.

We're also seeing a significant activity in the Gulf corridors, in particular, those related with energy. It should be noted we have a property right in front of the new refinery in Dos Bocas in Paraiso Tabasco. And that activity is also spilling over to Vermosa and to the other components of the energy sector in the Gulf corridors.

The -- I would say the [ laggards ] are mostly the metropolitan areas, in particular, Mexico City. You will see that most reports will indicate that there is reduced mobility and reduce activity within Mexico City. Obviously, Mexico City is the center of the pandemic in Mexico, as such, it's been mostly impacted by it.

But that being said, we're also seeing a nice recovery in that corridor. If you look quarter-on-quarter, we're still reaching interesting levels of occupancy. And we are seeing also an increase of activity there.

[Wilfredo Guilloty, analyst]

And one more question, if I may. You had significant cost reductions year-on-year and beyond what we expected. And so I was wondering how sticky some of those cost reductions are? I mean, could we expect some operational leverage going forward as the recovery pushes through due to the permanence of some of those reductions?

[Paul Márquez, executive]

Absolutely, Jorel. One of the -- so this is a true partnership between our suppliers, our employees and essentially all of the value chain that compose City Express. We have agreements that essentially decompose some of those savings with occupancy. Others are more of the permanent nature.

We have all decided to focus on the long term. And that has allowed us to achieve significant discounts. As I said, some of them are related to the occupancy, such as payroll, for example. Other will be more related to the -- or more permanent as we see situation of the operations. We have, for example, compensated the additional cost of tending to the pandemic requirements, such as the increasing cost of clearing the room and so on with supplier contributed savings, and those are more impermanent in nature. So as we move forward, you will see those advantages becoming permanent in our structure, in our cost structure.

[Luis Eduardo Barrios Sánchez, executive]

If I may add. This is Luis Barrios. I think that there's also something in addition to what Paul is mentioning. What I would say is that, let me mention that we turn over -- when we moved to home office mode, it took us not more than 24 to 48 hours to reach that situation, to be really in a home office you know? Nobody working in the premises, in the offices.

The reason is that, that proves that the technological platform that we have in place is very, very strong and robust. Now based on that, probably what we needed, and it was a little push towards using it more efficiently. And definitely, one good thing of the pandemic in that regard, is that it helped us realize that we could do a lot more things with a lower cost, less traveling expenses, less cost in the corporate office and eventually really help us also reduce the headcount.

So in -- towards now that we are in the process of coming back to the office, we will find that most of those good practices will prevail and should help us at the operating -- in the management company would help us also reduce our fixed cost as well as some variables.

In the hotel level, as Paul mentioned, fixed costs are also -- have been -- the reduction has been -- thank you to the partnership alliance that we designed and negotiated with our suppliers of the -- off several inputs in that cost category. And what you'll find is that we welcome that as we grow in sales, we will start to increase a portion of those costs, but not necessarily proportionally to sales.

And in variable cost, what we have agreed with our suppliers is as occupancy comes -- kicks in, and we are reaching a level -- acceptable levels of occupancy, also some minor modifications will be made. But in the end, we definitely believe that the result in the end is going to be a positive savings versus what we had in previous years.

[Operator]

[Operator Instructions] And 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, sir.

[Luis Eduardo Barrios Sánchez, executive]

Thank you. I would like to end this call by reiterating that we are pleased with what we have achieved in these past few months and believe the worst is now behind us.

We will continue to work tirelessly until the situation normalizes, but we are optimistic we will continue to see improvements over the next few quarters.

We look forward to talking to you in the next earnings call. And as usual, please feel free to reach out if you have any questions or comments in the meantime. We'll be more than happy to hear from you. Have a good day.

[Operator]

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