Grupo Hotelero Santa Fe SAB de CV

BMV:HOTEL

Earnings Call Transcript 2018-Q3

[Operator]

Excuse me, ladies and gentlemen, we now have our presenters in conference.

[Operator Instructions]

It is now my pleasure to turn the conference over to Max Zimmerman, Investor Relations Director for Grupo Hotelero Santa Fe.

[Maximilian Zimmermann Canovas, executive]

Hi, good afternoon for everyone in New York, and good morning for everyone in Mexico, and thank you for joining us today. My name is Max Zimmerman, and I'm the Investor Relations Director of Hotel. And I would like to welcome you for the -- to the company's earning webcast for the third quarter 2018.

On the line, we have Francisco Zinser, our Executive Vice President; Francisco Medina, our CEO; Enrique Martinez, our CFO; and Alberto Santana, our Administration Director.

Pancho and Paco are joining the call from remote locations, so they will give an introduction and afterwards participate in the Q&A.

The presentation slides we will follow during the call are available on our webcast, which you can find in our Investor Relations section of the website and also as a PDF which you can download on our website currently.

Before we begin, I would like to remind you that this call is being recorded and that information discussed today may include forward-looking statements regarding the company's financial and operating performance. Our projections are subject to risk and uncertainty, and actual results may differ materially based on a number of factors. Please refer to the detailed notes in the company's press release regarding forward-looking statements.

At the end of the presentation, we will open the call to any questions you may have.

We will now begin with the presentation. Please go to Slide 2, and I will pass the call to Francisco Zinser.

[Francisco Zinser Cieslik, executive]

Thank you very much, Max. Good morning, everybody. Well, we posted solid results for the first 9 months of the year, although our revenue and EBITDA growth ended below our expectations and we will proceed to explain. Basically, the top line came in lower than expected for the third quarter, mainly due to circumstantial, both internal and external factors. The most important effect came from the change in the model or of the cobranding with AMResorts, and the consequential change of model and the connectivity with AMResorts. It had a larger impact than we actually expected it would have, and basically, we are in the process of finalizing this integration. The change -- by change of model, what we mean is, we -- in the hotels, we are going to a full all-inclusive model. And as you might recall, we had some hotels that worked with the hybrid model, meaning EP plan like a regular hotel and all-inclusive. So what we basically are doing now is going to all-inclusive, and we did this in the summer season, which is mainly the domestic travel season, which is the part of the market that used the hybrid model more in terms of EP sales. So the switch -- although it hurt in the summer, what we tried to do also is do it most intensively when we have a less number of international travelers coming to our hotels, so to be prepared for the winter season, which is about to begin.

We are totally confident that the relationship and the cobranding that we signed with AMResorts is going to bring very substantial results, and will achieve the goals that we have foreset for this due to many reasons, one of them being a very -- a higher dollar-denominated sales percentage, meaning that we will have revenues in dollars for -- as a higher percentage of total revenues, and also it will give us access to more direct and diversified profitable distribution channels.

The external factors. We will basically highlight the group convention segment. Basically, due to the economic slowdown in Mexico, we did perceive a slowdown in what companies and government entities were spending in terms of groups for sales, for incentives, for training. And that -- as you know, we have -- in our hotels, we have substantial meeting facilities. So this is a segment that is relevant to the company. On the other hand, we also had the sargassum that was presented in Cancun, which though true basically, every year, it appears, historically, it was never in the amounts and the amount of months, almost 6 months versus 2, 3 months in the past and tremendous amounts of sargassum, which basically had an impact on the destination of Cancun and all of Cancun's surrounding areas.

Nevertheless, we have already gone -- or we have finished -- the sargassum is basically gone, so we expect that these issues should not be -- or hopefully, they will not repeat in the same amount in the following year.

We also had the impact of -- that affected negatively our expenses, which is the incremental cost in electricity. And this is really amazing and substantial, even though the government announced all these energetic reforms.

Just for your information, January-September 2018 versus the same period in 2017, the incremental cost of these expenses was 71%. So it's an extremely high amount, and that was something that we did not foresee.

Because of the previously mentioned issues that I have touched on, we are adjusting our guidance in terms of revenue to MXN 2,010 million and EBITDA to MXN 670 million, which implies a 27% growth rate in both lines for 2018 compared to 2017.

So now I will turn on the call to Paco Medina, our CEO. Paco?

[Francisco Medina Elizalde, executive]

Thank you, Pancho, and good morning, everyone. Let me complement with some other highlights. In relation to the tourism sector in Mexico, according to the figures from the Mexico Institute of Statistics and Geography, the INEGI, Mexico's international visitors increased 7%, and their spending increased 4% in the first 8 months of the year compared to the same period of 2017. This marks a healthy growth rate, but below what we saw in the last 5 years, which is a natural consequence of the accelerated historical growth.

On the other hand, the quarter of Mexico -- in this quarter, Mexico gained 2 positions, reaching the sixth most visited tranche in the world, according to the World Tourism Organization.

Moving on to our quarterly results. Total revenue was up MXN 475.1 million, and EBITDA was MXN 143.7 million, up 20% and 19%, respectively, compared to the figures recorded in the third quarter 2017. Regarding company-owned hotels, RevPar decreased by 6%, driven by 5.9 points decrease in occupancy, which was partially offset by a 3.9% increase in ADR. It's important to mention that during this period, we increased our room inventory in 18%.

This quarter, we also were proud to announce one acquisition and one operating contract. First, we announced the signing of a contract to acquire 50% of the Cleviá Grand León hotel for MXN 128 million. The property is a 5-star beautiful hotel located in León, Guanajuato, with 140 rooms.

Second, we announced the timing of our management contract for a 4-star hotel, the Double Tree by Hilton in Toluca, with 142 rooms located in the industrial part of Toluca in Estado de Mexico.

At Hotel, we remain committed to becoming the leading hotel company in Mexico. The extraordinary management team and associates we have assembled and the strategy we have aligned will allow us to continue growing efficiently and profitably in the long run. As always, we are thankful for the trust and support of our shareholders.

Moving on to our quarterly operational result. Please go to Slide 3, where I will pass the call back to Max Zimmerman.

[Maximilian Zimmermann Canovas, executive]

Thank you, Paco. During the quarter, total revenues increased 24% to MXN 385 million, driven by a 17% growth in room revenue, 38% growth in food and beverage revenue and 22% in other revenue and a 7% increase in third-party hotel management fee.

Room revenue growth was driven by the opening of the Krystal Grand Los Cabos, Krystal Grand Nuevo Vallarta and Krystal Grand Suites Insurgentes. The performance -- and also the performance of stabilized hotels, including the Krystal Urban Ciudad Juarez.

Food and beverage revenue increased 38% to MXN 119 million in the quarter, mainly driven by the growth of the Krystal Grand Suites Insurgentes, Krystal Grand Los Cabos and Krystal Grand Nuevo Vallarta, which are in the early stages of stabilization.

Management fees related to third-party-owned hotels increased by 7% due to the combined effect of a 4% increase in the number of rooms under operation and a 4% increase in RevPar during the period.

Now please move to Slide 4. Moving on to our key operational metrics. On a consolidated level this quarter, we posted a 2.8% decrease in RevPar, which is comprised of an ADR increase of 3.8% and a 4.1 percentage point reduction in occupancy, driven by the factors Pancho just mentioned.

Now please move to Slide 5, and I will hand the call over to Enrique Martinez, which will guide you through our financial results.

[Enrique Gerardo Martínez Guerrero, executive]

Thank you, Max. EBITDA in the quarter reached MXN 144 million, a 19% increase compared to the third quarter of '17. This result was driven by the combined effect of revenue growth, the growth of Krystal Grand Los Cabos and Krystal Grand Nuevo Vallarta as company-owned hotels, and the opening of the Hilton Hacienda at the Hilton Vallarta.

EBITDA margin in the quarter was 30.3% compared to 31.5% in third quarter of '17.

Moving on to operating income. We reached MXN 90 million compared to MXN 80 million in third quarter of '17. The increase was driven by the factors I just mentioned.

In terms of net income, we went from a gain of MXN 45 million in third quarter of '17 to a gain of MXN 123 million in the third quarter '18, driven by a higher net financing result combining with operating income growth.

Now please move to Slide 6. Net debt was MXN 2,241 million at the end of third quarter '18, which represents a total debt-to-EBITDA last 12 months ratio of 3.5x.

Total debt is mostly U.S. dollar-denominated, 86%, to be exact, and this tranche of debt has an average cost of 5.5%, while the remaining portion of 14% is peso-denominated, with an average cost of 11.2%, having a competitive overall debt mix of 6.3%.

Additionally, I would like to mention that over 88% of debt maturities are long term. The Mexican peso appreciated 6% by the end of the quarter and had a positive impact in our financial cost. Also, our short U.S. dollar position by the end of the quarter was $104 million equivalent to MXN 1,963 million.

Now please move to Slide 7, and I will pass the call back to Max.

[Maximilian Zimmermann Canovas, executive]

Thank you, Enrique. I would like to quickly highlight our latest 2 announcements which Paco just mentioned, and you can also see some pictures of the beautiful hotel of Cleviá Grand in León, which Paco also just mentioned. For this hotel, we announced the signing of a contract to acquire 50% of this 5-star hotel located in Leon,

Guanajuato with 140 rooms. Currently, brand alternatives for the property are being evaluated. The value of the asset is MXN 383 million.

Out of the total investment, MXN 127 million were debt, and Hotel contributed MXN 128 million, which represents 50% of the equity, and we will consolidate the results in our financial statements. The other 50% equity stake will remain with the group of private Mexican investors who previously owned the hotel. The property is in Puerta Bajío, a premium location in a mixed used real estate development, including a shopping mall, residential apartment, and office space developed by a famous Mexican architect. It is in the North of the city in the zona dorada, one of the fastest growing areas of the city.

And secondly, we announced the signing of a management contract of a 4-star hotel, the Double Tree Hilton in Toluca, with 142 rooms, located in the industrial part of the city in Estado de, Mexico.

The hotel, which is owned by a third party, is located on the Boulevard Industria Minera Avenue, very close to plants from General Motors, FCA, Coca Cola FEMSA and Heineken. The hotel is in final stages of construction and is due to open by early 2019.

Before I open up for questions, I would like to mention that we have demonstrated we know how to grow profitably while being disciplined with valuation. We also consider that we are in a unique position to continue taking advantage of the growing hotel industry in Mexico to become one of the leading companies in the country.

With that, I would like to open the call for questions and answers. Operator?

[Operator]

[Operator Instructions] And we have our first question. Our first question comes from José Espitia with Banorte.

[Francisco Alcocer, analyst]

My name is Francisco Duarte. I'm speaking on behalf of José Espitia from Banorte, and my question is, what can we expect from the guidance of the next year due to the change you have to do for 2018 guidance?

[Francisco Zinser Cieslik, executive]

Well, thank you very much. What we can say at this point is that, as usual, we will be sharing our guidance at the beginning of the year or in December. We're still working on our numbers. And at that point, we will share the goals that we have for 2019. We cannot, obviously, anticipate anything.

[Operator]

[Operator Instructions] Our next question comes from Hector Vazquez with GBM.

[Hector Vazquez Montoya, analyst]

I was wondering if you could give us more color on what to expect for ADR growth for the following year. Should it still be growing above inflation levels? And my second question is what is the remaining expansion CapEx for the next year?

[Francisco Zinser Cieslik, executive]

Okay. Enrique will address the CapEx -- the part of the CapEx question, Hector, thank you for participating. And well, basically, as you know, obviously, we are expecting to start to see the results of the cobranding as of next year. And although we cannot talk about a specific percentage. Once we relieve -- we release our guidance, I think we could have a clearer view on your question. And for Enrique?

[Enrique Gerardo Martínez Guerrero, executive]

And regarding the CapEx, our project for CapEx for the next year is around MXN 500 million to end our project in Insurgentes, which will be ended in the first quarter of 2020, with the annual investment of MXN 200 million. The remaining CapEx in this project is MXN 7,000 million.

[Francisco Zinser Cieslik, executive]

And I would like just to add, Hector, we did not comment on this during the call. But it is reflected in our report -- our quarterly report. Also, we are very close to finalizing the CapEx investments that we announced that we would do for the cobranding, which also have had some impact as well in our top line. But we will do a very small part of it next year. So basically, it seems to help us in that minor part.

[Operator]

And our next question comes from Christian Juarez with Santander.

[Christian Michelle Juarez Arroyo, analyst]

Did you have the -- if we exclude the AMResorts alliance in the occupation factor -- do you have the number if we exclude that alliance with them?

[Francisco Zinser Cieslik, executive]

The way we do, Christian, the way we report our hotels is into disaggregating hotels. We only disaggregate what are stabilized and hotels in the process of being stabilized. But it would be fair to say that the average of the AMResorts was lower than the average, specifically compared to the [ AR ] portfolio and to the previous year. But we do not disclose figures independently of properties. I don't know, Max, if you would like to add something?

[Maximilian Zimmermann Canovas, executive]

Yes. I think what you mentioned, Pancho, is the right way to look at it. And as you mentioned earlier in the call, it was because of the change in model and the change in brand and the connection of systems. However, we are already working to have all that ready for this winter season. So also, Pancho, as you mentioned, maybe we saw some unexpected short-term negative impact, but we are completely sure that this was the right decision and that there will be great benefits for having a higher dollarized income for these hotels, also with a higher ADR and occupancy in the medium and long term. But that's what we can comment for now. Thank you for your participation.

[Operator]

[Operator Instructions] And our next question comes from [ Edson Meduja ].

[Unknown Analyst]

My question is regarding to the AMResorts integration because my understood is this was an expected negative impact on this quarter, but my question is, are we going to see this impact for the following fourth quarter? And how long is going to take this integration because at the beginning of the conference, you told us that it took longer than you expect?

[Francisco Zinser Cieslik, executive]

Okay. Yes. Well, basically, and I would like to -- for Paco to finalize the answer to this. But just to go to the end of your question, we expect to have the integration fully finished by this year. I think we are close to reaching that goal. And we don't expect to have impacts of integration in the following year. One of the main challenges was the systems platform integration because AMResorts, through the process, acquired another large company, and they were themselves integrating this other company into their distribution system. So we were caught right in the middle of that process, and that is one of the reasons why. But I'm sure, Paco can give you more detail.

[Francisco Medina Elizalde, executive]

Sure, Pancho, and I will add to your comment that there is no question that in the answering the question of Edson in the last quarter of the year, numbers were improved compared to the third quarter. And as you mentioned, the integration of The Mark Travel Corporation, which is the second largest company sending travelers -- clients to Mexico and it was acquired by Apple Vacations. It will be finished at the end of the year, and that means we will be finished with integration.

[Operator]

And we have no further questions at this time. I would like to turn the conference back over to management for any closing remarks.

[Francisco Zinser Cieslik, executive]

Well, just I would like to thank all of you for participating and for your trust and your presence in Grupo Hotelero. As you know, and as Paco said, we are fully committed to continue to give extraordinary results amidst the challenges that we face. And we hope to see you or hear you in the next call for the end of the year. Thank you very much for participating, and have a great weekend.

[Operator]

Ladies and gentlemen, this concludes today's conference, and you may now disconnect.