Hoteles City Express SAB de CV

BMV:HCITY

Earnings Call Transcript 2017-Q4

[Operator]

Good morning, and welcome to the Hoteles City Express Fourth Quarter and Full Year 2017 Earnings Conference Call. [Operator Instructions]

Please note this event is being recorded. I would now like to turn the conference over to [ Cynthia Arroyo ] from Inspir Group Investor Relations. Please go ahead.

[Unknown Executive]

Thank you, and good morning, everyone. Hoteles City Express Fourth Quarter and Full Year 2017 Results were released yesterday after the market closed. The company's earnings release can be found on Hoteles website at www.cityexpress.com. During this call, management 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, CEO of Hoteles City Express; Mr. Paul Smith, CFO; Mr. Santiago Parra, Corporate Finance Director; and Mr. Santiago Mayoral, Corporate Finance and Investor Relations Vice President. Mr. Barrios will begin with some opening remarks, after which Mr. Smith will present the company's financial results. We'll then open for questions. Now it's my pleasure to turn the call over to Mr. Barrios.

[Luis Eduardo Barrios Sánchez, executive]

Thank you, Cynthia. Good morning, everyone, and thank you for joining us to discuss Hoteles City Express Fourth Quarter and Full Year 2017 Results. In a volatile year of -- for Mexico, balanced with strong underlying economic fundamentals. Our performance demonstrates the company's operational and financial strength. Today, we remain Mexico's leading hospitality company in terms of branded hotels with inventory throughout 30 states and 67 cities.

As we move to strategically actuate the value of our assets for the next stage of our developments, our unique competitive position is evident through metrics such as adjusted EBITDA margin, which was 37.5% for the fourth quarter, as we continue to expand our portfolio, reaching 136 hotels today and 140 in the coming weeks.

The hotel industry demonstrated robust dynamics in 2017, with strong demand for quality rooms at affordable prices. As such, Hoteles City Express achieved growth in total revenues and adjusted EBITDA of 23.1% and 29.0%, respectively for the full year. Significantly, we're now able to capture the benefits of infrastructure which can support over 200 hotels without large increases in our cost base. Reflecting this, our EBITDA growth 1.3x faster than total revenue over the year, with a 486 basis points rise in EBITDA margin to reach 36.4% in the fourth quarter.

Our diverse portfolio is benefiting from exposure to geographies with robust growth above the national average. In particular, the Bajío region major metropolitan areas and those with exposure to the Maquila sector are demonstrating solid demand and pricing trends, while our international properties continue to perform better and better.

Critically, we have seen 3 quarters of positive RevPAR growth in the eco-energy corridor and are optimistic about the recovery of the area in the future. growth of nearly 11% in ADR and greater than 8% in RevPAR over the year reflect a regional operation, distribution and marketing platform that is best-in-class.

Our yield management strategy to better utilizing firm capacity through higher prices has paid off. The initial gap caused in occupancy has closed. With the metric reaching 62.6% during the fourth quarter, a 114 basis points higher than the same period 1 year ago.

For 2018, the company plans to open between 15 to 21 additional projects. Note that 80% of these are already under construction, and we have credit facilities to comfortably execute our development plan. Looking ahead, City Express has assessing strategic alternatives to capture value off its portfolio of assets, and we -- as we disclosed in our performance call of January, after an in-depth review over the past 18 months, our Board of Directors decided the most efficient alternative was to create a vehicle under the tax regime of a lodging REIT, named FIBRA STAY.

A key rationale for this transaction will enable -- will be to enable shareholders to realize the value of our assets in a transparent manner and reinforced future growth without dilution.

This structure will strengthen our capacity to boost the number of hotels we put into operation, optimize our balance sheet, raise ROIC, reduce capital intensity and create a more tax-efficient structure. It is worth mentioning that even though the execution of FIBRA STAY is a top priority for the company, we have the flexibility to adopt other strategic alternatives, as we have in place substantial credit facilities and the trust structure has already been created.

With a demonstrated strength of our business model, we reiterate our commitment to shareholders to continue being the best alternative for profitable growth in the market. Thank you for your trust, and we look forward to keeping you updated.

I would like to hand the call to our CFO, Paul Smith who will further provide detail on our financial and operational performance. Paul, would you please?

[Paul Márquez, executive]

Thank you, Luis, and hello, everyone. My comments are based on our fourth quarter and full year 2017 results which were prepared under IFRS.

For both periods, we saw substantial success of our strategy to boost margins by maximizing the installed capacity, while the efficiency of our operating company supports ongoing economies of scale. Hoteles City Express had 135 hotels at the end of 2017 and more than 15,200 rooms in operation, up 11% from the prior corresponding period. Occupied room nights were over 50% higher and served more than 3.5 million guests.

During the quarter, we had a total installed capacity of 1.35 million room nights, a rise of 13% on a year earlier. While chainwide occupancy dropped slightly over the year, as we raised our rates, it rebounded to 62.6% in the fourth quarter, 114 basis points higher than the prior corresponding period.

As Luis mentioned, this dynamic is significant, as it demonstrates our success in making better use of installed capacity and will underpin margin expansion in the -- into the future. As anticipated, now the gap in occupancy is closed. We expect demand to drive further growth, and our confidence in the ongoing success of our sophisticated yield management strategy which utilizes real time market data. This supported the top line strength of our properties during the quarter, with an average daily rate of 4.7% to MXN 927.

As a result, we achieved RevPAR growth of 6.6% to MXN 580 from the same period one year ago. Our established properties which have been in operation more than 36 months had occupancy levels of 65.2% for the period. These properties have ADR growth of 3.7% and RevPAR growth of 2.1% to MXN 589.

Our financial results for the quarter were very strong, helped by factors such as the ongoing absorption of our operating company into our cost base, as we achieved higher operating efficiencies. Consolidated revenues were MXN 686 million, 24.3% higher than a year ago. In terms of productivity, the company posted a 51% rise in operating income to MXN 154 million, while adjusted EBITDA rose nearly 44% to almost MXN 260 million.

Operating income and adjusted EBITDA margins rose over 400 and 500 basis points respectively to 22.5% and 37.5%. We achieved this even as our hotel chain grew almost 10% over the period. Full year ADR was up nearly 11% to MXN 934, while RevPAR grew over 8% to MXN 562. These gains along with a greater number of occupied room nights saw the total consolidated revenue increase of more than 23% to MXN 2.5 billion.

Company operating cost and expenses rose 19% for 2017, as 12 new properties were put into operation. Revenue growth outsped the growth in cost during the quarter and demonstrates the growing efficiency of our operating company. This establishes a solid foundation for further escalating.

For the full year, Hoteles City Express booked in a rise of 37% in operating income to MXN 511 million, while the adjusted EBITDA was up 29% to MXN 879 million. Operating income and adjusted EBITDA margins were 20.4% and 35% respectively, higher than last year even with a near 10% increase in the number of hotels.

Financial expenses for the full year rose to MXN 170 million, reflecting the increase in the cost of funding during the last months due to inflation and volatility in the market. Net income rose 8.3% to MXN 286 million during 2017, delivering a net income margin of 11.4%.

Turning to our balance sheet. At the end of the quarter, we had MXN 1.2 billion in cash and equivalents, a nearly 36% reduction from December 2016, as we did draw on our credit lines and used reserves to develop our hotel portfolio. We remain focused on raising ROIC closer to the levels of our established property portfolio between 12% to 14%. We have a financial debt of MXN 2.7 billion and are current in all commitments. The company's debt remains mainly long term, with only MXN 139 million during the next 12 months.

Of our total indebtedness, we hold approximately MXN 157 million denominated in U.S. dollars, hedged with a cash position for the same amount. Net debt at the end of December was just over MXN 1.5 billion.

In summary, our financial position enabled us to realize our ambitious development plan, as we focus on the execution of our strategic alternative and profitable growth, supported by a strong pipeline. Thank you for your attention. Nicole, we can start the Q&A.

[Operator]

[Operator Instructions] Our first question comes from Alejandro Lavin with [ TD ] Bank.

[Unknown Analyst]

I have a couple of questions. The first one on the margins. So obviously you posted very strong margin this quarter, and I think it is due mostly to lower hotel OpEx. So could you give us more color on this? And if these are sustainable going forward? Or maybe there was a couple of oneoff that benefited this quarter? And my second question would be on occupancy. Now that these have normalized, what levels of occupancy would you expect for 2018?

[Paul Márquez, executive]

Alejandro, this is Paul Smith. On the first question for the margins. As we've seen over the last 2 that the main increases we are realizing now is basically from scaling off the operating company. Those margins still have significant room to grow, as Luis mentioned in his presentation, the operating company can handle over 200 properties. We only have 135 at the close of the year and 136 to date, so we believe that the increase in margin is sustainable, given the economies of scale that we are starting to realize and the SG&A leverage that we still have at the operating company level. On occupancy...

[Santiago Mayoral, executive]

Alejandro, this is Santiago Mayoral. Occupancy levels for 2018 should be in line with what we have been seeing over the past years. We should be increasing occupancy at the same levels we have been doing it before the yield management optimization from the first quarter of last year.

[Operator]

[Operator Instructions] Our next question comes from Pablo Ordóñez with Itaú.

[Pablo Ordóñez, analyst]

Luis, Paul, Santiago, I also have follow-up on margins. The cost from the hotel -- the operation were 49% of revenues, and it used to be around 53% of revenues in the past. This was also a big support for EBITDA margin this quarter. I was wondering if this is -- should we expect this same margin to sustain in this year? And also I have a second question regarding the tariff. After implementing successfully your inventory and yield management strategy last year, what should we expect of in terms of tariff for this year relative to inflation?

[Paul Márquez, executive]

Pablo, this is Paul Smith. Thank you for your questions. On the first question, yes, bear in mind that there is 2 factors going into margins. One is the maximum stabilization of the properties, which also include the margin performance. The other one is the opco SG&A leverage that I already discussed. So you're right. As we mature the portfolios then you also gain the advantage of that additional margin. Actually, going forward, as we disclosed, quarter performance has stabilized and the nonstabilized portfolio, this is going to be completed in the analysis of the numbers. And the second question on the ADR, we're expecting an increase of 200 basis points over inflation. So that should remain for next year as well in RevPAR.

[Operator]

And our next question comes from Armando Rodriguez from Signum Research.

[Armando Rodriguez, analyst]

Well, my question is regarding your debt strategy. Considering this new vehicle in [indiscernible] states, what's the debt to EBITDA levels you -- we should expect considering this new vehicle? And if this changes significantly your strategy.

[Paul Márquez, executive]

Armando, this is Paul Smith again. Thank you for your question. No, the new vehicle will not change the overall leverage profile of the company. We always say that we feel comfortable with a 2.5 net debt to EBITDA multiple, so that should check -- that should be the case going forward as well, up to 2.5% -- 2.5x.

[Operator]

[Operator Instructions] And our next question comes from Alan Macias of Bank of America.

[Alan Macias, analyst]

Just a quick question on how you're looking at the pipeline of hotel openings? And if you just can give a rough number or a percentage in terms of openings by quarter through the year?

[Paul Márquez, executive]

Alan, this is Paul Smith. Thank you very much for your question. As it's disclosed, we have a profitable year, around 17 properties for the year, and basically, they are already disclosed in the Page 15 of the yearly report.

[Operator]

[Operator Instructions] As we have no further questions, I would like to turn the conference back over to Mr. Luis Barrios for any closing remarks.

[Luis Eduardo Barrios Sánchez, executive]

Thank you. Well, thank you very much for your attention. Finally, I will like to add that later today, we'll be holding our shareholders meeting over FIBRA STAY transaction approval. We are confident this sets us in the right direction, and we'll be glad to communicate the result of voting in a couple of hours. Please, feel free to contact us with any further information. Thank you all.

[Operator]

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