Hoteles City Express SAB de CV

BMV:HCITY

Earnings Call Transcript 2020-Q4

[Operator]

Good morning, and welcome to Hoteles City Express Fourth 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 Vázquez, Investor Relations Director from Hoteles City Express. Please go ahead.

[Héctor Montoya, executive]

Thank you, and good morning, everyone. Hoteles City Express fourth quarter '20 results were released yesterday after the market closed. They are available on Hoteles City Express Investor Relations website. We want to remind you that during this call, management's 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 Mr. 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. Please, Luis, go ahead.

[Luis Eduardo Barrios Sánchez, executive]

Thank you, Héctor. Good morning, everyone, and thank you for joining us today to discuss City Express fourth quarter results for the year 2020. We hope all of you and your families are staying safe.

To start my comments today, I would like to say, I am incredibly proud of what we have achieved as a company in the past year. In a challenging year for the hotels industry globally, we ended the period with a 30% occupancy in the portfolio, above our breakeven point for EBITDA generation. The results showcase a material quarter-on-quarter improvement, explained by an improvement in the macroeconomic scenario and our flexible business model. With a subdued competitive pressure, we have also improved our market penetration in the different places where we operate. Furthermore, we have not received requests for corporate rate negotiations. We believe that this business line, together with local agreements, digital media and the direct sales channel will be our road to recover.

I want to thank everyone in the team since it is the -- it is only because of your hard work and continued support that we continue to deliver sequential improvement even as the pandemic's negative impacts unfold. During the fourth quarter, we saw improving trends for both leisure and business travel. Also, we were affected in late December by a tighter lockdown rules as COVID-19 cases picked up again.

We have seen higher mobility levels as customers adapt to the new reality. More travelers are moving by car throughout the country, making shorter trips and demonstrating a stronger preference for hotels with strict biosafety measures and a fair price. These trends are well aligned with our corporate values as we intend to provide a safe and pleasurable experience to all our guests, as we always have. We still don't expect the international travel will come back in the short term, at least until there is more coverage on the vaccination front, both domestically and abroad.

In the business segment, which is still our primary focus, we see a trickle-down effect from the U.S. recovery. This effect is getting even stronger this year, primarily explained by the increased confidence given their vaccination programs' speed. The most benefited sectors are those related to manufacturing for export. In some of the categories produced in Mexico, inventory level in the U.S. reached relatively low levels. Thus, as consumer activity has picked up, demand for more goods has increased and manufacturing facilities are ramping up. These trends are mostly supporting demand in the northern corridor as well as the Bajio region. Our hotels in metropolitan areas face more pressure, but thanks to our portfolio of diversification, we can manage this effect.

Despite the challenging environment, our business model's flexibility, response speed, communication strategy and experience with the digital world allowed us to maintain our leadership position in the different locations where we operate. Furthermore, the decision we took many years ago to empower everybody in the organization has led us to stand today in a position of leadership.

Even during a crisis, our company found opportunities to enter untapped market segments by introducing new products, such as City Expressions or additional distribution channels like Sojern and/or Nibis, which connect us to travel agencies that open up our portfolio to new markets, including the leisure economy -- the leisure segment.

In sum, we can continue to generate client loyalty and position our brand as one of the best priced for value brand in the region, and we will continue to use all our advertising, public relations and marketing tools available by analyzing the property's market needs, industry by industry and segment by segment, as we have been doing in the recent past.

Let me also say that managing our balance sheet liquidity and leverage ratios continues to be one of our priorities. We continue evaluating different strategies, the strategic alternatives while maintaining prudence on our CapEx plan, continuing to benefit from the debt grace period and pursuing asset recycling opportunities. We sold part of our land reserve in Irapuato during the fourth quarter, and we have a binding LOI for the sale of another land plot in Colombia. We are confident that all these combined with our MXN 1.5 billion unlevered wholly owned and co-owned hotel portfolio puts us in a strong position to improve our leverage profile.

Looking ahead, we expect our commercial efforts and our commitment to the highest service level for our guests will be vital to reaching our goals. In times like this, I am confident that we need to take advantage of all the expertise we built over the last years around our clients' needs as well as our profound understanding of market dynamics in our current business segment and as we increase our participation in the leisure economy segment of travelers.

Our technological platform enables us to closely monitor the market and be assertive as we possibly can. We intend to get closer to our clients and be even more connected to the market. We will continue to empower our frontline team, and I am sure that they will lead us will we must go.

Before I go, I want to mention that our commitment to sustainability is strong as ever. Even throughout 2020, when our business was suffering, we innovated and found ways to positively impact our environment, our people and the communities around us.

During the year, we became the first Latin American hotel chain to report under SASB standards to communicate financially material sustainability information to investors. For 2021, we have the goal to analyze more deeply our exposure to climate change. And with it, implement the recommendations for both disclosure and management given by organizations such as TCFD and CDP. We believe this will make our operation even more robust and sustainable, which will generate value to all our stakeholders over time. It will also better align us with our investors' needs.

Now I would like to hand the call over to our CFO, Paul Smith, who will provide you further information on our financial and operational performance. Please, Paul, proceed with your remarks.

[Paul Márquez, executive]

Thank you, Luis. My remarks here are based on Hoteles City Express fourth quarter and full year 2020 financial results, which were prepared under IFRS.

Our portfolio closed the year with 154 properties in total. This compares to 152 hotels as of 2019. Of the 154 hotels in operation at the end of the quarter, 132 were established properties, 11 more than the fourth quarter's 2019. We closed the quarter with 17,514 rooms, a 1.7% increase compared to last year's comparable period.

At the chain level, our ADR seasonally decreased 0.9% quarter-on-quarter to MXN 949, and the occupancy rate grew 710 basis points to 29.9%. With both impacts combined, RevPAR increased 29.7% quarter-on-quarter, closing the year at MXN 271. While this is still being impacted by the pandemic restrictions, mainly in the metropolitan areas, we are encouraged by the sequential improvement.

Revenues totaled MXN 386.8 million for the quarter and MXN 1.4 billion for the year. This implies a 52.7% and 53% year-on-year decrease, respectively. Notably, revenues increased 30.4% quarter-on-quarter.

Total costs for the quarter decreased 16.9% year-on-year to MXN 555 million as we maintain cost savings agreements with both suppliers and employees. But we took a MXN 71 million hit from our one-off balance sheet account write-down and capitalized expenses and account reconciliations. That brings us to the fourth quarter adjusted EBITDA, which was negative MXN 60.7 million.

It is important to note that had we adjusted for the write-down, we would have reported positive EBITDA, showing our consolidated results have surpassed its breakeven occupancy point. Comprehensive financing costs increased 38.8% year-on-year during the quarter to MXN 159 million, still reflecting the drawdown of our revolving facilities, which we did to ensure our liquidity throughout the sanitary emergency.

Our financial liabilities increased 20.9% year-on-year to MXN 6.5 billion. Cash and cash equivalents also increased to MXN 1.1 billion, bringing net debt to MXN 5.3 billion. Our net loss for the quarter was MXN 327.5 million because of all the aforementioned trends combined. This represents a slight deterioration compared to the third quarter net loss, given the impact of the effect I described before on our balance sheet.

In summary, this quarter showed a very relevant sequential improvement in our operating numbers, which was, to an extent, offset by our decision to be more conservative with our balance sheet. We are optimistic about 2021 as we expect mobility will continue to improve in the coming quarters and as COVID cases decline and the vaccination program picks up, and we're ready to take advantage of it. We will remain very disciplined with our balance sheet as we continue to analyze different strategic alternatives to guarantee the best capital structure we can find for the future of the company.

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

[Operator]

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

[Wilfredo Guilloty, analyst]

I have 2 questions. One, I apologize if you explained this already, but -- and I might have missed it, but I wanted to get a little bit more detail about the balance sheet write-down. What exactly was this focused on? Was it on receivables or just if you could provide some details around it? And just if we should expect any more of this going forward?

And then the second question is, you've been obviously tackling the leverage situation, getting extensions, refis, what have you. And I just wanted to get a sense if you have some sort of road map on how we should think about leverage? Because as it stands right now, you do have net interest expenses outpacing EBITDA. And so we just wanted to see if there's some sort of path forward that we should be taking into account. Anything you can provide us any color into how we should think about leverage perhaps by this time next year. Those are my questions.

[Paul Márquez, executive]

Thank you, Jorel. This is Paul Smith, and thank you for your questions. For the first question, let me start by clarifying the nature of the adjustment. During last year, we embarked in a review process to streamline, digitalize and make more agile all of our core business processes. Part of this review included the analysis of every single one of the accounts in our accounting ledgers in every single one of almost -- or almost 100 entities that fall under our consolidation circle. The reconciliation of accounts resulted in a negative adjustment of about MXN 20 million that we recognized in the fourth quarter. The main accounts here were essentially accounts that had to do with receivables and payables, and the net effect was the MXN 20 million that we described.

Additionally, we reviewed our accounting policies to ensure that we were conservatively enough to the change in the environment. And this effort resulted in a noncash adjustment or increase in our provisions for about MXN 24.2 million additional.

And lastly, and consistent with what I just mentioned in terms of being more conservative, typically, when we have a severance payment, what we do is that we run the effect of that severance for 12 months. What we essentially did is at the end of 2020, we simply said we'll recognize the full amount for the year, given that the size of the severance payments were an anomaly and not necessarily consistent with what we typically see on a yearly basis. Now the bottom line of this explanation is to communicate that we have been able to reach property level positive cash flow or GOP at the 21% to 22% occupancy level and consolidated EBITDA from operations at the 30% occupancy level.

And to address the second part of that question, no, we don't expect more adjustments like this. This was clearly a one-off. And we -- since we had basically the time and the effort to -- given that we have low occupancy and so on to do a process like this, we took the advantage of that low occupancy so that we could improve our business processes and be concluded with it. So it's truly a one-off.

Now in terms of the lever situations, as we have disclosed, we are reviewing multiple alternatives. We want to have -- the time line we have is that we want to have a definite plan set and being able to explain that plan probably by the mid-second quarter of this year. We want to anticipate, we don't want to wait until next year when it's the end period for that revolving line. We want to have that situation clear and the plan confirmed, as I said, as an objective, by mid- to end second quarter of this year. And that plan will probably have a combination of things.

As you know, we have alternatives to do asset recycling. We have a land bank that's about MXN 775 million. We also have, as Luis mentioned, unlevered assets in Mexico for about MXN 1.5 billion, and we have a portfolio in Colombia, that's about USD 60 million. That's also on average. And we certainly believe that we can use that both in the asset recycling effort or as collateral. If we don't find the adequate price for those pieces of land and projects, we can use them as collateral to do refi and to have a plan ready by the date I just mentioned. I don't know if that was clear enough, Jorel.

[Wilfredo Guilloty, analyst]

Yes, I mean, that was clear. I just wanted to touch on the provision. So it was not clear to me exactly what was provisioned under the MXN 50 million that you wrote -- you talked about.

[Paul Márquez, executive]

So the MXN 24 million is -- so we didn't have to do write-downs on the receivables. But what we did is to adjust our -- when we recognized something as deemed to be provisioned for collection. So we essentially shortened the days where we include something to be provisioned, and that was mainly what we have there. So we essentially became more conservative in the policy of recognition of provisions in terms of receivables.

The first one was simply, imagine that we have, as I said, almost, we have 98 entities that fall into the consolidation circle. And we hadn't do a reconciliation of those accounts for about, I don't know, some years. And doing the process of making sure that every single value there, which, at the entity level was not material and also at the consolidated level was not material. But since we were streamlining the processes and making sure that we started this process of automation, digitalization with a clean ledger, that resulted -- that reconciliation resulted in that MXN 20 million adjustment.

[Operator]

[Operator Instructions] The next question comes from Froylan Mendez with JPMorgan.

[Fernando Froylan Mendez Solther, analyst]

This is Froylan from JPMorgan. So how many rooms per year does your corporate account took in 2019 and how it compares to 2021 so far? That's my first question.

Secondly, what percentage of your footprint do you think could be repositioned to penetrate the leisure sectors? And do you think this would require to create a new brand?

[Paul Márquez, executive]

Thank you very much for those questions, Froylan. As you already know, the project is mainly geared towards the business traveler. And as such, it's consistent with having north of 83% of our rooms typically get filled with that business segment. Now that being said, what we have found is that given the impact of the pandemic in 2 aspects: one, it has increased the need for terrestrial, land, travel, short trips that are domestic in nature and that where you were a principal element of the trip has to do with safety and making sure that you are not exposing families and such. And we have selected some of our properties. Some are very obvious, like the TD Central, the Wahaca or like the ones that are near beaches, where we also see that there's potential there for leisure travel and we have been capturing some. But we're also creating routes. And one of the reasons why we created City Expression is precisely so that we can create some a la carte menu of activities that would complement our offering.

Now given our very competitive price per value offering, we believe that this will be very attractive. Again, for that domestic traveler, that's now thinking of doing this land type of trips and so on. We don't believe that we will need to reposition any of our brands in terms of changing the -- creating a new brand or changing the names of the current brands. We believe that, that will not be necessary. We will complement our offering with things like City Expressions, as I said, and make sure that, that process enable us to bring activities and things to do to our properties in an efficient digital manner. This effort, by the way, has resulted in very attractive repositioning of some of our properties, and we continue to expand that to the rest of the portfolio as those opportunities arise.

[Luis Eduardo Barrios Sánchez, executive]

Paul, if I may make comment?

[Paul Márquez, executive]

Yes. Absolutely, Luis, please.

[Luis Eduardo Barrios Sánchez, executive]

Thank you. Yes. What -- in that I was caught up from the conference, I don't know why I'm just -- I missed the question, but I'm trying to pick up on the topic that Paul was mentioning. Really, what's been -- what we found this -- or this opportunity is it's been there all along since City Express existed. I guess we were taking -- now we're taking the leisure market as a more important market for us. Therefore, we are concentrating in developing and reinforcing the marketing channels that I addressed specifically to the local market traveling around the country.

So what we've been doing is creating product like the City Expressions. Also, we are doing some minor adjustments in the service, extending probably the hours for breakfast and beating up a little bit the breakfast as well as some, let's say, general manager cocktails at the end of the day that would also be well received by the leisure traveler. And also, together with this, we are reinforcing our distribution channels. So by doing that, we are also -- with the specific channels that address the leisure traveler in Mexico, we're establishing advertising and public relations campaigns.

So we are, let's say, I would summary -- sum up by saying that we are beefing up our presence in the leisure market. And with a large coverage we have and the well-recognized brand, we're trying to put the City Express brand name in the same status of the -- for the business traveler. But in this case, the leisure traveler that not only visits the different towns in Mexico during the weekends or holidays, but also during the weekdays. There's a lot of people that travels for no business matters during the mid-week, the weekdays, and we are trying to be much more present in that portion of the market. We are confident that we should achieve success in it and get more market share and, therefore, occupancy at this time.

[Fernando Froylan Mendez Solther, analyst]

And maybe in that regard, how would this strategy play into your ADRs? I mean are you able to push prices a little bit higher when you tackle the leisure traveler? Or do you have to go lower to attract maybe a more competitive market?

[Luis Eduardo Barrios Sánchez, executive]

No. No. People today -- well, no, we don't. Normally, there are certain discounts over the important holidays, but not on weekdays. And I think our price point has really -- it's right there for the leisure traveler. It's very appealing the price point that we are today. So we don't expect discounts on that.

And the other important matter is if you see our rates, our rates declined in a single-digit number from year-to-year compared to the competition that has double-digit declines in ADR. Really, what we have -- we trust and we bet on it, is that people is not traveling because of price. They are traveling because of trust in the brand and quality of service and security. And I think that the cities proceeded as that brand. And therefore, you see why we -- even with a 1-digit reduction in ADR versus the competition that did much more, we had more market penetration.

People are -- people in this pandemia are really traveling not because of price. The price is not enticing. It is the precaution of getting the COVID. So in our case, I think that this is a proof that City is a quality brand with all those measures in, and people are buying quality and security. So we don't plan to discount on that.

[Operator]

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

[Luis Eduardo Barrios Sánchez, executive]

Thank you, operator. I would like to end this call by reiterating how proud we are with what we have achieved in 2020. It was a big test for our business model and philosophy, and we all feel satisfied with the results.

We will continue to work tirelessly to generate value for our stakeholders during this year, as we have always had. We look forward to talking to you in our next earnings call, and thanks for your interest in our company.

As usual, please feel free to reach out if you have any questions or additional comments. We will be more than happy to hear from you. Thank you.

[Operator]

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