Hoteles City Express SAB de CV

BMV:HCITY

Earnings Call Transcript 2021-Q3

[Operator]

Good morning, and welcome to the Hoteles City Express' Third Quarter 2021 Earnings Conference Call. Thank you for joining us today. I want to turn the call over to Héctor Vázquez, Investor Relations Director from Hoteles City Express for opening remarks and introductions. Please go ahead.

[Héctor Montoya, executive]

Thank you, and good morning, everyone. Hoteles City Express third quarter 2021 results were released yesterday after the market close. 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 line.

Joining us on today's call are Mr. Luis Barrios, our CEO; Mr. Paul Smith, our CFO; and Mr. Santel Parra, our Corporate Finance Director. Luis will begin with the opening remarks followed by Paul who will present the company's financial report. 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 City Express results for the third quarter. We hope you and your families continue staying healthy and safe.

I am delighted to share with you the results our team achieved for the third quarter. We all know the world saw the third wave of the COVID-19 pandemic fueled by the Delta variant over the past few months. Despite how contagious this variant is, the increase in vaccination coverage both globally and locally has allowed us to operate under less restricted conditions. This meant that the negative impact we saw, particularly in August, had a lesser effect on occupancy than what we had seen in previous waves. In addition, mobility throughout the country continues to improve, and we see our clients more open to traveling and returning to the standard demand patterns, combined with our marketing efforts led to what I see as another set of results that showcase the resilience of our portfolio, not dependent on luxury and upscale business and the group's and convention segment.

Historically, we have been focused on the business traveler, and we believe that this will continue to be one of our key strengths in the future. At the same time, as we have discussed in previous quarters, this year, we have increased our efforts to attract opportunities in other demand pockets for our hotels, such as more leisure travelers and the new variety of traveler are rising from the COVID pandemic.

Through marketing campaigns like the [ Scoober City ], increasing digital advertising in the U.S., investing in technology that enhances our brand presence online search engines and even billboard ads in the main highways throughout Mexico, we have positioned City Express as a brand for everyone and adapting to the new needs of the digital nomad. We have also been capable of attracting medical tourism by leveraging targeted campaigns in the northern corridor.

Our core business segment continues to be -- to recover as demand from business travelers continue to improve, in line with the recovery of the manufacturing, agricultural and energy sectors. Evidence of this is in the occupied rooms data in hotels located in business corridors and incorporate agreements request and air travel trends across Mexico. To give you a sense of this, domestic corporate agreements over the past 2 quarters have generated better results for us than what they used to do before the pandemic began with room occupied through these agreements, 25% above what they were in 2019.

In addition, requests for proposals, or RFPs, for new corporate agreements have also picked up significantly lately with occupied room nights and average daily rates above 2019 levels. We continue to be enthusiastic about the dynamics in the export sector and motivated by the return to normalcy in business travel. We have proven that the virtualization of their functions does not yield the same results as their physical presence for business travelers in our segment. An excellent example of this is the activity observed in the border corridor, where the manufacturing for export sectors has been boosted by measure in trends and has acquired the presence of more planned supervisors and managers who are frequent guests of ours.

Based on our large business traveler base and the new discovery of the remote work, City will be able to increase the average length of stay through the concept of location, the evolution of pleasure and new lifestyles. As excited as we are about the recovery in our top line, which grew by 23% in a quarter-on-quarter basis, we continue to be very focused on controlling our expenses. Since the pandemic began, we have been able to optimize our resources and decrease our spending on energy consumption and automated processes within our supply chain. We intend to maintain these efficiencies going forward. Thanks to this, for the first time after 5 consecutive quarters of operating losses, we reported a positive operating income of MXN 36.6 million and grew our EBITDA by 63.4% to MXN 159 million quarter-on-quarter.

I would like also to highlight that historically and in a normalized scenario, the third quarter is ranked as the second best performer of the year in terms of EBITDA generation.

The last topic I would like to discuss before handing the call over to Paul is our capital structure. As you all know, through the first phase of our recent equity issuance process, we have raised MXN 290 million. We are currently working on the second phase with several investors conducting a very detailed due-diligence process. We expect to conclude over the next few months.

In addition, we are talking with different investors, including potential strategic partners and private equity funds that would add value to our company beyond their equity investments.

Furthermore, we have seen that the bid/ask spread in the private transaction market has recently improved, which opens the door for more asset sales at fair prices. An example of this is the land plot. We recently signed a binding promise to sell in Puerto Montt, Chile, where we will be closing the transaction 31% above our entry cost. We also have received a binding selling LOI for the Carlton Hotel in Mexico City, which was booked as part of our land bank. Both transactions together represent more than 10% of our land bank and we are still open to analyzing more capital recycling transactions if we are sure that in executing them, we generate value for all our shareholders.

Now I would like to hand the call over to our CFO, Paul Smith, who will provide further detail on our financial and operational performance. Please, Paul.

[Paul Márquez, executive]

Thank you, Luis. Our remarks are based on Hoteles City Express' third quarter 2021 financial results prepared under IFRS. Our portfolio closed the quarter with 153 properties in total. This compares to 153 hotels as of the third quarter of 2020. Of the 153 hotels in operation at the end of the quarter, 133 were considered established properties, 6 more than the third quarter of 2020. We also closed the quarter with 17,449 rooms, a 0.2% increase year-on-year.

At the Chain level, our ADR increased 9% year-on-year to MXN 1,044, and the occupancy rate increased 20.8 percentage points to 43.6% over the same period. With both impacts combined, RevPAR increased 108% year-on-year, closing the quarter at MXN 456. On a sequential basis, ADR increased 4.5% and RevPAR increased 20%. As Luis said, we are very encouraged by the continued sequential improvement in our portfolio results.

Revenues totaled MXN 637.8 million for the quarter. This implies 115.1% year-on-year increase and a 22.9% quarter-on-quarter increase. Total costs for the quarter increased 26.6% year-on-year to MXN 600.3 million, a small variation than the increase in revenues. That brings us to the third quarter EBITDA, which was MXN 159.3 million. This is an increase of 63% quarter-on-quarter.

Comprehensive financing costs decreased 16.7% year-on-year during the quarter to MXN 142.3 million. Our financial liabilities decreased 3.9% quarter-on-quarter to MXN 6.1 billion. Cash and cash equivalents increased to MXN 1 billion, bringing net debt to MXN 5.1 billion. This is a 5.9% sequential decrease in our net debt.

Our net loss for the quarter was MXN 106.8 million because of all the aforementioned trends combined. This represents an improvement compared to the MXN 302.5 million quarterly net loss from the third quarter of 2020.

In summary, the progress in vaccination programs and increasing mobility have led to an economic recovery that is bound to continue showing improvements in our operations at 2021 end. This was directly reflected in our occupancy, which led to our first positive operating profit figure in over a year. We will remain very disciplined with our balance sheet and capital allocation strategies and are optimistic about the operating leverage we will see ahead.

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

[Operator]

[Operator Instructions] And the first question comes from Jorel Guilloty with Morgan Stanley.

[Wilfredo Guilloty, analyst]

I have 2 questions. The first one is so your -- when we look at your numbers and ADRs and occupancy, we see that ADRs are near where they were pre-COVID and the occupancy is increasing at a healthy clip. But what I was wondering is, as you look at the state of affairs right now and you look at this ADR and you do see that occupancy still needs to increase, how do you -- when you look at things going forward, are you looking to push ADR further up? Or is the focus right now clearly just to increase occupancy in order to increase that revenue figure? And then how much -- not necessarily for guidance, but how soon do you think you might breach 50% or even go back to pre-COVID levels on occupancy?

And then the other question is I wanted to understand a bit better about the time lines or deadlines that you talked about for the capital raise. In the earnings release, it says you expect it to end by year-end or maybe early 2022. So I just wanted to understand what are the factors that are driving that date range. So what are the deadlines or goalposts that need to be met in order to have this complete?

[Paul Márquez, executive]

Thank you very much, Jorel, for your questions. This is Paul Smith. On the first question, so if you look sequentially at the recovery, let me start with the occupancy trend and then I'll move on to ADR. So the recovery against 2019 numbers was 59% for the first quarter, then we were 68% of 2019 numbers. By the second quarter, we are now -- or third quarter is 78% of 2019 numbers. What we are anticipating with what we're looking at October and the bookings we have for November is probably be around 85% to 87% of those numbers by the end of the fourth quarter.

Now -- so that's the trend line we're looking at, and that would indicate that we should be probably at 2019 numbers by mid-2022. That's also -- if you just draw a line and you continue with that. Obviously, this doesn't incorporate any unforeseen events. And as 2020 has showed us, we need to incorporate those in our projections, but that's how the trend line looks for occupancy.

Now that being said, it's all predicated on regional economic activity. If, for example, we're splitting the country into our portfolios by regions, you would actually see that some of our regions are actually already above 2019 numbers. In particular, the northwest part of Mexico is already operating at above 2019 numbers. Same thing for the southeast portion of Mexico, in particular the one in the energy corridor is already operating above 2019 numbers.

We are seeing some laggard activity in the mid part of the country in terms of occupancy. That's mostly driven by the automotive industry. As you know, there are some supply chain issues with microprocessors, and that's essentially delaying or reducing the production capabilities of those manufacturing activities, and that's essentially reflecting in our occupancy as well. So that's essentially what we're looking at.

Now for ADR, we are actually already above 2019 numbers. The third quarter, on average, reflected 102% over or 2% above 2019 numbers in terms of ADR, and that's also driven a lot by 2 things. One, we are -- we have a very competitive product, and we're not seeing pressure from the underlying competitors in terms of ADR. So we are optimizing that. If anything, what we're looking at is higher product actually reducing significant dealer prices to try and to match our offering, and that will be the only pressure, but there's still significant space between us and them, for us to come ahead in terms of the ADR increase.

And secondly, we're also seeing some strong wins in terms of the weakened occupancy and the weakened ADRs, and that's mostly B2C that's not predicated on a contract and uses more the public rate as opposed to the discounted rate that we typically use in the corporate contracts we signed. So that combination, that twofold combination, it's what's driving the ADR. Obviously, you see larger increases in ADR as well in some of the regions where we are operating above 2019 numbers.

Just to give you a reference, on that same northwest corridor, we're seeing increases in ADR of about 15%, 1-5, above 2019 numbers. So that gives you a range of what's driving those 2.

Now in terms of the second question, as stated in our release, we're looking for that year-end to early 2022 date. The factors driving that decision, mostly what we want to accomplish, Jorel, is something that actually enhances our strategic plan. And that is we're looking really closely at investors that will be critical in our effort of separating the asset-heavy and the asset-light components and maximizing value or unlocking that value for our shareholders. So that's essentially what's driving that decision, and that is also essentially what's driving the type of investors we're attracting.

We want to attract somebody that's going to be strategic. This is not just solving for the momentarily balance sheet transaction. We're looking for something that's going to enhance our strategic position in particular because we believe that there's going to be significant opportunities within the sector in the near term. So that's essentially what we're looking at.

[Operator]

The next question comes from Armando Rodriguez with Signum Research.

[Armando Rodriguez, analyst]

Particularly in this quarter, you saw some significant efficiencies related to your margins. So my question here, if you're seeing sustainable levels, particularly on the EBITDA margins, in the following quarters? That's my question.

[Luis Eduardo Barrios Sánchez, executive]

Armando, thank you very much for that question. So we have been mentioning throughout the previous quarters that we took a very hard look at our cost base, ensuring that we would take advantage of any opportunities we could find. So what we did basically all of last year and I would say the last 2 quarters of last year was essentially focused on capturing those opportunities, optimizing and automating most of our processes and ensuring that we could capture those advantages. We also did a lot of work in reviewing energy consumption and ensuring that we were optimizing our cost base, as I said, without affecting the brand promise or the value offering.

With that in mind, we believe that most of those adjustments are permanent. And you're right, we are seeing an increase in efficiency. We're looking at the estimated numbers for the U.S. industry and in particular for similar companies to us. And we have an advantage in terms of -- if you look at the U.S. market for the third quarter, you will see that they only have a reflection of a reduction -- I'm sorry, of 5% in RevPAR estimated for the industry. We had -- or we are estimating something more similar to a 22% to 20% decrease in our case. But when you look at the margins for EBITDA, we're about 34% below 2019 numbers, and the U.S. is only 30% below 2019 numbers. So what I'm telling you is that we're significantly ahead of those competitors that could be comparable to us in terms of the efficiencies, and we believe that those will be a permanent picture.

Also, and not simplifying it, as you know, we have always focused a lot on distribution. Our platform, as you know, delivers more than 80% of our reservations through our own proprietary channels. We continue to look at those investments with really good eyes, and they have resulted to be very productive. Our brand and the way we communicate to the market is yielding a significant advantage in terms of fostering that brand power and reflecting itself in our distribution costs, which we believe is one of the best in the industry as well.

[Operator]

[Operator Instructions] The next question comes from [ Valentin Mezzo ] with [ Exalibur ].

[Unknown Analyst]

Congratulations on the recovery. I have a couple of questions, if I may, Luis and Paul. The first one has to do with -- you just mentioned that you are actually expecting to see over mid-80s performance when compared to 2019 as soon as the fourth quarter. My question is, how should we think about occupancy levels in regard to what you're actually seeing what's gone -- I'm sorry, with what actually happened until these days in October? How are you seeing further differential recovery there?

And the second question that I have for you guys is on the permanent adjustment that you just highlighted. How should we think about your EBITDA or adjusted EBITDA margins going forward? And by assuming that those -- part of those adjustments will be permanent, should we think about mid-30s back again or probably any further?

[Paul Márquez, executive]

Valentin, this is Paul Smith. And again, thank you very much for your questions. So on the occupancy trend, so if -- as of today, what we're looking at is actually an occupancy trend for October that it's nearing, I would say, the 48% to 47% occupancy just for the month of October. If you look at the bookings and what we're looking for November, you could somewhat predict at a similar level for November. And then obviously, December is a little bit too ahead to have any certainty, but that's what's driving essentially our forecast, that we should be around that 85% to 87% recovery to 2019 numbers for the fourth quarter.

And let me really reiterate this. It's all dependent on nothing else happening. Obviously, that's what we're looking at right now. One of the things that gives us confidence in the recovery is that we are actually starting to see some recovery in the activity of that mid-part manufacturing belt. As that corridor recovers, it would push significant occupancy in our project because restarting those plants is not necessarily easy. Historically, what happens is that we have had a significant occupancy driven actually by the adjustment of those supply chains, and we're starting to see a pickup in the activity there. So as we see that trend normalizing and basically the effect of the logistical [indiscernible] evaporating, we anticipate that we should have something strong. And actually, that's what we're looking in our numbers right now.

So we're optimistic that those things combined will continue to push forward. Obviously, the northwest corridor continues to behave very interestingly. There's a lot of demand for -- as Luis mentioned, for nearshoring activities, in particular manufacturing. Every single town in the border has the same trend. It's behaving very well. And on the other front, the metropolitan areas, which were basically impacted by corporate travel, is also starting to reopen. So we're also starting to see some trips as well. In particular, Mexico City numbers and Monterrey and Guadalajara numbers continue to push forward, and we look at that trend very optimistically. So those are the 2 things.

Now in terms of the EBITDA margin, if we were already, let's say, 2019 numbers, and we had that occupancy already, what we anticipated in previous calls is that the changes we have made to the cost structure should be reflected in about 300 to 500 basis points more margin at the EBITDA level at that occupancy level. So that's the estimate for that.

[Unknown Analyst]

Pretty useful. One final question, if I may. I just wanted to get a sense on the digital marketing that you were already conducting. You mentioned that you are targeting or you're doing targeted campaign. Just wanted to know if you're doing this internally and probably leveraging your loyalty program? Or how are you doing this?

[Paul Márquez, executive]

So we are doing it internally, but we are also using the assistance of partners to achieve that. In particular, we're using a supplier that provided us with artificial intelligence that looks directly into how to capture traffic or demand to our properties for specific words. We are actually -- we have actually invested in the past in that company, so it's part of our circle of corporate BC efforts. And so we get, I would say, a very interesting cost structure by how we capture that. It's mostly on a commission-based and a conversion rate.

Actually, if you were to see the conversion rate our digital channels, what you would find in our direct B2C channels, what you will see is that our conversion rate has actually increased significantly. And we believe that these targeted efforts have resulted in significant increases.

I'll give you a small example. We had a really good season for the -- as you know, over the summer or the end of the summer, you have the vineyard Vintage Festivals in Ensenada and in the Guadalupe Valley in Baja California. We managed to attract significant traffic from U.S. travelers to our properties and to get rates that actually surprised all of the company in terms of the amount that we were able to capture with these type of efforts. And it's working out, I would say, pretty nicely to enhance our weekends and so on.

[Luis Eduardo Barrios Sánchez, executive]

Valentin, this is Luis. Let me tell you, on the digital arena ecosystem, what we have been doing is investing heavily in a proprietary software as well as in training of all our people. We have software that has the yield management, that has AI for detecting profiling the City access or the City premiums, which is the frequent guest program, behavior, et cetera, et cetera. But we are of the -- and we are convinced that in order to make it in this ecosystem, you have to do some investments yourself.

In addition, you invest in companies that does -- or yes, offers this kind of software or this kind of knowledge and technology at a more efficient basis. And also, you use affiliates like DSPs, networks, publishers, et cetera. So it is an ecosystem that in the end, you don't own it all, but you are part of the solution and part of the action being taken in that regard. So it is a mixture of a little bit of everything in order to be successful and be able to compete to the larger distribution networks in the world of the larger, mainly foreign chains that are present in Mexico.

[Operator]

[Operator Instructions] The next question comes from [ Brad Lindenbaum ] with [ Stone Forest ].

[Unknown Analyst]

I'm wondering if there are any changes in the timing of finding the new shareholders or the new investors and if there are changes in the parties who are interested?

[Paul Márquez, executive]

Brad, this is Paul Smith. No, we continue to anticipate that we will close this process by the end of the fourth quarter or early 2022. And actually, we have added a couple of more strategic investors to the list, and I would say those are the main changes.

[Unknown Analyst]

And in terms of asset sales, can you just comment on the progress so far and your thoughts about that progress and what to expect going forward?

[Paul Márquez, executive]

Sure, absolutely. So as Luis mentioned, we have finally started to see a closing in the bid and ask price for assets within our sector. That being said, there are a lot of assets right now in the market as well. And some of those assets have been put in the market with, I would say, a more significant discount than ours. So we're looking at those trends carefully. As Luis mentioned, we will be willing to continue with the asset recycling, and we believe it actually makes or adds value to our shareholders. But we will not enter into, let's say, a fire sale mode where we will get desperate for resources.

One of the advantages of having refinanced, I would say, more than 80% of our debt is that it gives us time to analyze the opportunities in the market to take advantage of them. That being said, we noticed that some of the other players that have placed assets in the market are not necessarily in the same position. And we believe that for the shorter term, the discounts, even though reduced, will continue to be present.

[Luis Eduardo Barrios Sánchez, executive]

In other words, this is Luis, we won't do fire sale. We would take it easy on that front. Obviously, if there was an opportunity to sell at a reasonable price, we will consider it very seriously.

[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.

[Luis Eduardo Barrios Sánchez, executive]

Thank you very much. Thank you again for being here. I am excited about our company's future as we have become more disciplined and driven to generate value for our shareholders than ever. I am grateful to all of you who have trusted on us, allowed us to strengthen our capital structure further, and we are committed to not disappoint you. We are focused on closing the year positively and start 2022 ready to tackle new challenges. We look forward to talking to you in our next call. But in the meantime, please feel free to reach out if you have any questions or comments. We're always happy to talk with all of you. Thank you, and have a good day.

[Operator]

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