Hoteles City Express SAB de CV

BMV:HCITY

Earnings Call Transcript 2018-Q4

[Operator]

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

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

[Ivan Peill]

Thank you, Andrea, and good morning, everyone. Hoteles City Express' fourth quarter and full year 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 report 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, and very good morning. Thank you for joining us to discuss Hoteles City Express fourth quarter results for 2018.

In a year that had episodes of uncertainty and that put the strength of the Mexican economy to the test, our platform closed the fourth quarter propped up by robust market dynamics, sustained growth and a constant demand for quality rooms at affordable prices.

Although some specific places in the central region of the country during December 2018 experienced a slower-than-planned pace of economic expansion, the resilience of our portfolio is well -- as well as the specific market dynamics that drive the real economy of locations where we have presence, again differentiate us positively. In this sense, the border corridor of the north of the country, the metropolitan markets such as Mexico City, Guadalajara and Monterey, the export and agricultural corridor located in the Pacific and the Northeastern region of Mexico presented more than favorable dynamics with in demand -- both in demand and supply. While there was softness in certain parts of the Bajío region, we don't perceive any structural dynamics that could change our review about its economic potential. We attribute the softness to the change of the presidential administration, which resulted in government layoffs and to the gas crisis and, in turn, less travel in last December.

Against the backdrop, robust market conditions and healthy supply and demand balances, combined with our digital operation as well as our distribution platform, enabled us to drive ADR nearly 8% higher than the fourth quarter of '17. Chain-wide occupancy for the quarter posted healthy levels despite the opening of 9 properties over the last 3 months of 2018, registering 60% and, therefore, generating a positive dynamic in RevPAR, which grew 3% compared to that of the fourth quarter of last year.

Regarding our established hotels, we continued to deliver on our promise, to capture more value from our assets using sound yield management practices and posting ADR growth of more than 8% for the portfolio as well. As we did in the past, we continue to optimize RevPAR for these assets via price. I would also like to point out that 70% of our properties ranked in the top 1 or 2 places in their respective markets at the end of the year, reflecting the strength of our brands and our marketing capabilities as well as the strong price value relationship of the City Express offering.

The combination of all these factors allowed us to -- in fourth quarter '18, to post robust operating income margin, expanding 160 basis points of those -- of the same quarter of last year.

On the development front, we opened 13 hotels during the year, adding 1,500 rooms and bringing the total capacity to approximately 17,000 rooms. Thanks to our expertise on this matter, at the end of 2018, we operated 148 hotels in 30 states of the country and 70 cities in Mexico, more than double than the number of hotels we had at the time of our IPO in 2013. We are proud to be Mexico's leading hospitality company but equally proud of our ability to effectively manage cost while growing our business.

Looking into 2019. In light of the strength we see in our markets and the return on capital we are generating at stabilized hotels, our development plan for this year calls for a rollout similar to the last year, with 17 new properties to be opened during the next 12 months, primarily located in metropolitan markets such as Mexico City and Guadalajara; and cities with a strong economic growth potential such as Cancún, San Luis Potosí and Mérida. In the same sense, 35% of the pipeline will correspond to the City Express Plus-branded hotels, a renewed brand under which properties can adopt higher rates that translate in robust ROIC metrics.

It should be noted that although we remain confident on the strength of our product and its market potential going forward, our discipline in development and operational flexibility allow us to quickly react and adjust to the pace of growth favoring the generation of cash flow, if required.

With strong financial position and agile operation platform, coupled with a diversified footprint across Mexico, we are ready to overcome any challenges that may arise in the next future.

I will turn now the call over to our CFO, Paul Smith, who will provide you with more details on our financial and operating performance.

[Paul Márquez, executive]

Thank you, Luis, and good day, everyone. My comments are based on the fourth quarter and full year 2018 results, which were prepared under IFRS.

Hoteles City Express had 148 hotels with almost 17,000 rooms in operation at the end of the year, an increase of 13 new hotels compared to the fourth quarter of 2017. Occupied Room Nights increased 4.2% to nearly 881,000, while Installed Room Nights rose 9.5% to approximately 1.5 million.

With the addition of new hotels to the portfolio, throughout the quarter we saw a mixed but positive dynamic regarding RevPAR, with chain-wide occupancy rate registering approximately 60% at the end of the quarter and ADR increasing 7.9%, generating a 3% growth in RevPAR over the last 3 months of 2018. A significant commercial success, especially considering that ADR levels for the fourth quarter of 2018 are 300 basis points above inflation.

Within our portfolio, 106 hotels are established, while 42 hotels or 28% of the portfolio are nonestablished, having been in operation for less than 36 months. For established hotels, ADR increased 8.3%, again noting a very healthy pricing performance, while occupancy posted 62.3% and RevPAR rose 3.3%. As Luis anticipated, our profitability optimization efforts across the chain are also reflected on this portfolio, especially considering that in a business hotel like ours, reaching occupancy levels higher than 60% implies having the hotel fully booked from Monday to Thursday.

The installed capacity optimization strategy we had implemented in the past continues to bear fruit as we push for higher prices, reducing inventory utilization with positive growth on marginal revenue and profitability.

Fourth quarter consolidated revenue under IFRS rose 9.5% to MXN 752 million, primarily due to the increase in Installed Room Nights and to the increase in ADR, that is the result of our yield management efforts over the past 2 years.

In our hotel administration business, revenue continued to grow strongly, up 35.8% on higher activity in our hotel operation business during the quarter and higher revenues for supervising the development of new hotels.

Our operating costs and expenses continue to be in line with the sales growth, increasing 8.3% to MXN 567 million in the fourth quarter. However, it is worth mentioning that the sales and administrative expenses, a large component of our costs, rose only 5.8% to MXN 119.7 million compared to the aforementioned 35.8% increase in hotel administration sales, reflecting the scale benefits of our hotel administration and management platform.

Growth in operating income continued to exceed that of sales, increasing 17.5% over the 2017 comparable quarter to MXN 181.4 million.

In this line, EBITDA and adjusted EBITDA grew 4.7% and 2.7%, notable growth considering the opening of more than 1,000 rooms during the quarter and a close to double to the number of rooms opened in the fourth quarter of 2017.

Net financial expenses increased to MXN 66.8 million as we draw on credit lines during the last 12 months to fund the construction of new hotels and had a higher interest rates than in 2017. As of today, more than 70% of our debt portfolio is hedged at a very competitive rates. And we are actively looking to increase it.

As we invested more than MXN 800 million in hotel expansion on the fourth quarter, our cash and cash equivalents stood at MXN 1.1 billion at the end of the year, a decrease of 7.4% to that of the fourth quarter of 2017, but still a very healthy level considering our future debt service commitments and our minimum operating cash.

Finally, regarding our firepower going forward. At the end of the year, Hoteles City Express had MXN 1 billion in committed and not-yet-disbursed credit lines. Our net debt-to-EBITDA ratio continued to be low at 3.5x, a level we feel to -- we continue to feel very comfortable with and on a consolidated level. That represents less than 31% of our total assets.

With this in mind, our 17 properties development plan for 2018 and most of our 2020 pipeline, also between 15 to 20 new properties, is already funded and under different stage of development in the construction. As mentioned, the strength of our brand and the potential of our product, as for penetrating new and existing markets, remains the ground for expansion going forward.

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

[Operator]

[Operator Instructions]

And our first question comes from Froylan Mendez of JPMorgan.

[Fernando Froylan Mendez Solther, analyst]

Could you just delve a little bit more on how much of the ADR growth would you attribute to the change in mix of the hotels? And what should we expect for ADR growth this year considering the mix is going to be more comparable, let's say? That's the first question.

[Paul Márquez, executive]

Thank you very much for your question, Froylan, this is Paul Smith. I will refer to the fact that the same growth we saw in the portfolio can also be seen in ADR in the growth of the established portfolio. In that sense, what I'm basically telling you is that it's not predicated upon the change in format. That portfolio is still not of significance within the total portfolio, even though it's growing. So it's more attributed to the fact that we are optimizing our pricing strategy, as Luis mentioned.

[Fernando Froylan Mendez Solther, analyst]

And for next year?

[Paul Márquez, executive]

For the next year, 35% of our development pipeline for 2019 is basically City Express Plus brand. And even though those hotels come with a higher opening ADR, the portfolio still would be less significant than that of the -- I guess, more robust Express traditional portfolio. So again, it's more predicated on our ability to do pricing above inflation, as we have stated before, and also more predicated on our ability to optimize our pricing based on the segments that we attempt.

[Fernando Froylan Mendez Solther, analyst]

Okay. And if I may, just one last question. How are your electricity contracts being reflected into your numbers? Or how should we think about those savings that you are getting? And how much was this quarter?

[Paul Márquez, executive]

Actually, really good question as well, Froylan. Bear in mind that when we announced the PPA that we signed, we also disclosed that we would not benefit from those rates until, basically, the third quarter of this year. So in that regard, we're still paying higher electricity costs throughout most of our portfolio. The impact was significant in the third quarter -- fourth quarter, I'm sorry, as it was for most of the industry. We estimated that we had an excess impact of around MXN 9 million in the quarter above our budget for the quarter in electricity costs. We still have an advantage, and I think we also disclosed it. The hotels are highly efficient from the design they have in terms of energy consumption. As you know, even the first hotel we opened, we -- after we opened it like -- actually like 7 years after we opened it, we certified it in terms of energy efficiency consumption. And it turns out that it complied with standards that were not even in place in the moment we designed it. So with that in mind, our properties are not only sustainable but also highly efficient in terms of energy consumption costs.

[Santiago Mayoral, executive]

And Froylan, this is Santiago Mayoral. Just to complement on Paul's comments. It's important for you to note that on our financial statement, margin expansion via the operating leverage that the operating company showing is significant. So basically, the expenses of the operating company are growing in less than half of the growth in revenue. So that's why you are seeing -- you are still seeing, even though we have a large portion of our inventory opening in the fourth quarter and we have some deviation on the energy costs, you are still seeing positive growth on the EBITDA.

[Fernando Froylan Mendez Solther, analyst]

Great, great. And those margins are likely reaching a stabilized level, right, and they're all like around 33%? That's what we should think about in the long term for that specific part of the business?

[Santiago Mayoral, executive]

No, Froylan. Remember that a stabilized property 36 months after operation yields 38% to 42% EBITDA margin. So we are still in line with obtaining those metrics once the entire inventory is stabilized.

[Operator]

[Operator Instructions]

Our next question comes from Pablo Ordóñez of Itaú.

[Pablo Ordóñez, analyst]

Quick question. Can you give just an update on your plans to list FIBRA STAY?

[Paul Márquez, executive]

Thank you very much for your question, Pablo. This is Paul Smith again. We have said that the structure is formed and ready to be launched to the market. We are basically -- we need the Mexican rates to stabilize and to begin an easing cycle for that. The latest consensus of the market in that regard is that probably by the end of the first half of the year, we should see a change in stance by the Banco de Mexico. And with that, after we see probably a reduction between 50 to 1,000 basis points reduction on the rate, we can launch the vehicle to the market. That is still the long-term strategic objectives of the company. Pablo, I'm sorry, 100 basis points.

[Operator]

Our next question comes from Christian Constandse of GMB (sic )[ GBM ]

[Christian Constandse, analyst]

Can you comment further on the slowdown in occupancy for established hotels? Is this due to more competition or just slowdown in overall demand?

[Paul Márquez, executive]

Christian, this is Paul Smith. We actually had mixed results. So we're seeing more of an impact -- it is basically those regions that were impacted by 2 factors. One was the -- in the Bajío region, the gasoline shortages started in the last week -- in, I guess, by mid-December. And we started seeing impact in those areas that was impacted by that shortage. On the second one, typically, in a governmental transition, the existing or the legacy administrative officers are basically, instead of traveling, preparing what's called the white books. And then the new incoming officers are also seeing activities related to taking control of those offices. With that regard, typically, what we see is a reduction in governmental expense. Actually, the governmental expense for December was reduced in 25%. That being said, we are only attributing those factors. We're not seeing any reduction in the demand dynamics in our market. And because of our structure, we also don't see any impact on the supply side of the business. So it was more a temporary effect related to these 2 issues.

[Luis Eduardo Barrios Sánchez, executive]

And this is Luis. I would probably add another comment is that I would say that the signals that we have received from the new government staff probably have been a little bit crowded in the first couple of months of the administration. And I would say that, that has rocked the boat a little bit in most of the consumers and companies. So as mentioned, as Paul was mentioning, it is a mixture of several casualties in the same period. We don't foresee any major problem. Obviously, we have to be aware of the cycle we are in. But I think the City with its products and its price level is well positioned to overcome that. And so we are like a watchdog today, duly operating the company on a daily basis in order to be able to capture all those opportunities that would definitely, definitely will come to rise.

[Christian Constandse, analyst]

Okay. So is it fair to expect for this year occupancy between what we saw in 2018 and 2017?

[Paul Márquez, executive]

Yes, absolutely.

[Santiago Mayoral, executive]

Christian, this is Santiago Mayoral. Just to provide some context on the current levels of the established portfolio occupancy. In order for a hotel to be at more than 60% occupancy level for us, you have to be fully booked from Monday to Thursday. So with an 8% increase in ADR and a positive increase in RevPAR and the hotel fully booked 4 days of the week, we still believe our inventory has a lot of strength going forward. So as we have done in the past, we are pricing increases. We have been able to increase not only the marginal revenue of the properties, but also we have been able to significantly increase profitability of our established portfolio. So this is the dynamic that we continue over this year and that will support the same levels of occupancy in the portfolio from -- in 2018 and 2017 for this year.

[Operator]

[Operator Instructions]

This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Barrios for any closing remarks.

[Luis Eduardo Barrios Sánchez, executive]

Okay. Thank you again for spending time with us in this earnings call. We remain committed to being LatAm's best hotel platform and to capitalizing our growth opportunity in Mexico and the rest of the region, to deliver the kind of performance we discussed today. As always, our financial and Investor Relations team are available to answer any other questions you might have about our financial and operating results. So please feel free to contact them and have a good day.

[Operator]

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