NH Hotel Group SA

MAD:NHH

Earnings Call Transcript 2018-Q1

[Javier Vega-Penichet]

[Audio Gap]results conference call. This is Javier Vega from Investor Relations. The call will be opened by the Co-Chairman, Alfredo Fernandez. Then our CEO, Ramón Aragonés will guide you through main guidelines of the solid operating results published yesterday as well as current trading. Lastly and before the Q&A session, CFO, Beatriz Puente, will give you more color on the financial results below EBITDA, highlighting the early redemption of the 2018 convertible bond. So let's get started with the introduction of our Co-Chairman. Please, Alfredo?

[Alfredo Fernández Agras, Chairman of the Board]

Thank you, Javier. Good afternoon, and welcome to all. I just want to emphasize some key messages before passing to Ramón and Beatriz who will comment on the first quarter results. NH is performing extremely well. The message implemented in the 3-year strategic plan of both higher revenues and margins are delivering actual results, and there is more to come. The early conversion of the convertible bonds is a good decision. The fact that we are in a position to convert is a positive. Not only converting was a pillar in the deleveraging strategy, but doing it earlier has also ancillary financial savings. I understand that this may cause additional short-term volatility, but I advise you to look at the results and listen to what Ramón and Beatriz will say soon. As a result, our current position is now underlevered, and we need to seek ways to address this. And this could potentially include increasing dividends or buybacks. I would also like to address the potential outcome of the HNA sale process. We know there is strong interest for the stake, and interested parties are just waiting for the final clear process instructions. As a final remark and just to reinforce, the company is doing very well. We are here to defend shareholders' interest, whilst as Chairman, I would never allow this company to be put in danger. Our effort is based on growth and good projects and not [indiscernible] leverage. The management continues to be focused on efficiency, and that will lead to value creation. The bad old days of high debt and optimistic M&A projects are behind us. Now Ramón?

[Ramón Aragonés Marín, CEO, MD & Executive Director]

Thank you, Alfredo. Good afternoon, everyone, and thank you for joining us today. This is Ramón Aragonés speaking. In line with the excellent performance of 2017, I'm delighted to present our solid start of the year. As you can see, in the highlights on Page 3 of our presentation, the group's strong momentum continues in Q1 2018. With the combination of solid revenue growth of 5%, prices contributing 50% of the RevPAR growth and efficiency measures leading to an EBITDA margin improvement of plus 1.3 percentage points. Moving to Page 5 of the presentation. Total revenue grew 4.5 -- 4.9%, sorry, in Q1 2018, reaching EUR 345 million implying an increase of EUR 16 million. Excluding the negative currency evolution in LatAm, total revenue growth with constant exchange rate would have been plus 6.8%. It's important to note that the revenue growth in Q1 2018 has been driving the healthy performance of the like-for-like perimeter with a plus 6.9% growth rate, with constant FX. This strong like-for-like revenue growth was supported by all markets, with a remarkable performance in Italy, plus 9.5%; Benelux, plus 8.1%; and Spain, plus 6.4%. Hotels renovated in 2015 grew revenues plus 70% but are offset by the opportunity cost of 2018 reforms, affecting mainly the hotel in New York, one hotel in Spain, 2 hotels in Italy, and 2 hotels in Germany. In Page 6 of the presentation, you can see that revenue growth was driven by a combined growth strategy of ADR and occupancy and explaining because Q1 is seasonally the lowest quarter of the year. In order to follow the RevPAR trend by quarter, it is worth highlighting the plus 4.8% growth in the like-for-like or comparable perimeter. This number -- sorry, this number confirms the group revenue management competence, the constant increased market share ahead of competition, supported by the higher quality of our hotels. In Page 7, average RevPAR growth versus competitors has outperformed with a relative increase of plus 1.2 percentage points explained mainly by a higher relative price increase of plus 1.2 percentage points and similar relative occupancy. On Page 8 of the presentation, Q1 2018 performance by region is as follows. Spain, like-for-like RevPAR grew 8%, out of which prices contributed 60%. Strong revenue evolution on a like-for-like basis excluding the refurbishment, mainly in New York with an opportunity cost of minus EUR 1.4 million. As such, like-for-like revenue grew 6.4%, highlighting the performance of Madrid plus 6 -- 7.5%, while Barcelona grew plus 1.6%, that means an important improvement versus the minus 8.6% we had the last quarter of 2017 as you know. Including the minus EUR 2 million of hotels under renovation, like-for-like revenues increased plus 4.7%. Italy is doing an extraordinary performance, and we expect to have the same behavior the rest of the year. We expect very good news from Italy this year. The like-for-like RevPAR during the first quarter 11%, and like-for-like revenues plus 9.5% with the strong performance of Rome with 14.6%; Milano, plus 11.1% and secondary cities, 7.5%, including 2 [indiscernible] hotels under reform in Rome, Milano, like-for-like total revenue grew plus 8.6%. As I've said already before, we expect an extraordinary year in Italy in 2018. With regard to Benelux, like-for-like revenue grew plus 8.1%, supported by the good performance of Amsterdam, 11%, and Brussels, 10.6%. Let me mention that in Brussels where, as you know, we had many problems the last 2 years because the [indiscernible] the city right now is totally recovered, and we expect an extraordinary behavior this year. This is quite important because, as you know, we have had 500 new rooms with 2 new hotels but our forecast for the year is extremely positive. Total revenue grew plus 14.7% impacted by the opening of 3 [indiscernible] hotels, 2 in Brussels, as I mentioned, and 1 in Eindhoven. In Central Europe, like-for-like revenue grew 4.6%, despite the impact of Easter calendar shift and we mark the performance of Berlin and Frankfurt. Moving to LatAm, all regions negatively impacted by currency devaluation. Mexico increased revenue 2% at constant exchange rate. And including the negative currency evolution of minus 6%, reported revenue decrease minus 4%. Argentina grew 41% in local currency and including the minus 31% currency evolution reported figure is minus 3%. And in Colombia, Hotels Royal revenue decreased minus 4% in local currency due to the higher [ supply ] in Bogota and the lower corporate revenues. We expect better behavior in the coming months in Colombia. With regards the cost evolution on Page 9, the continuous focus on cost control allowed us to report a very healthy conversion rate of 57% at GOP level. In order to achieve this excellent result, payroll costs increased by plus 3% and 2.8% in operating expenses. Moreover, perimeter changes due to new openings explained 41% of the increase on staff cost and 70% of net operating expenses. Lease payments and property taxes increased EUR 4.2 million; new openings explained 25% of the increase and 2017 reforms another 23% of this increase. Variable lease component explained 32% of the total increase. With all of this, revenue growth together with cost control, allowed us to improve EBITDA margin by 1.3 point percentage points and to reach a recurring EBITDA before [ onerous ] in Q1 2018 of EUR 15.7 million, EUR 5 million versus the previous year and 45.9% versus the previous year with a 31% of conversion rate from incremental revenue to EBITDA affected by new openings. Excluding perimeter changes and reforms, like-for-like conversion rate reached 40%. Regarding Q2, I can anticipate you that we have finished the first 4 months of the year above budget. And considering that in May and June, let's say, altogether our forecast is to reach the budget that we will finish the first half of the year above the budget at the EBITDA level. That's why I'm absolutely convinced that we are going to reach all our targets this year, including the EUR 260 million EBITDA guidance of 2018. And now let me turn the call over to Beatriz. She will give you more details on the P&L, the leverage and targets for the year. Beatriz?

[Beatriz Puente Ferreras, Executive MD of Finance & Administration]

Thank you, Ramón. And this is Beatriz Puente speaking, and good afternoon, everyone. At the bottom line level of the company, I will highlight the significant reduction in financial cost by EUR 3.5 million due to the higher free cash flow generation on the refinancing process that the company carried out last year with the full amortization of the 2019 bond. The higher corporate income tax of roughly EUR 2 million is explained by the higher earnings before taxes, and also the company had also to pay taxes, minimum taxes in the specific 3 years during this first quarter. The reduction of the negative net recurring income, I will highlight, are taking into account that for the company the first quarter is always the weakest throughout the year. Therefore, it's very important that we'll have been able to improve this metric by roughly the same amount that will have improved the recurring EBITDA of the company. Saying that, the total net recurring income has reached roughly negative EUR 22.9 million. The nonrecurring items is mainly at -- includes mainly the announced contribution of the net capital gains from asset rotations, roughly EUR 55 million. That has been partially offset by the depreciation of the write-off that we have done regarding the CapEx of New York. As you are aware of, we will announce the repositioning of New York asset, very good news for the company for the future. And also includes in the nonrecurring items the redundancy payments done regarding -- applied to the efficiency plan. Both -- it's important to highlight for this company, both gross capital gains from assets rotation and also the taxes that are related to that asset rotation are included within this category. We don’t include that within the EBITDA level of the company. Therefore, the results of the company, total net income reached positive EUR 21.7 million, an improvement of EUR 46.5 million versus last quarter, mainly as I said due to the higher contribution of net capital gains and the improvement of the company at operating level. Regarding cash flow, and we move to Page 11 of the presentation, the good operating cash generation of the company has compensated the CapEx paid during the period taking to account that it's the weakest quarter for us so the CapEx is affected -- the CapEx payments are affected by the deployment or the timing of the deployment of that CapEx. Throughout the year, we'll have a guidance of total CapEx to be paid of roughly EUR 140 million. Also the improvement in the net financial position of the company is explained, I would say, by the good operating level, the good working capital performance and, of course, the cash contribution from the sale of Barbizon, the transaction that we announced in February, and remember that this the gross cash for the Barbizon transaction has been for the company roughly EUR 155 million with a good multiple in terms of transaction-wise, and we maintain also the sale and lease of -- the lease of the property. And also, remember that we will pay the taxes [ quarterly ], therefore, taxes for this transaction will be roughly EUR 33 million, out of which EUR 6 million has been paid during the first quarter. It's important to highlight that as of the end of March this quarter, the company held cash position of EUR 227 million. And the company also have more than EUR 300 million in available credit lines, out of which recall that EUR 250 million are long term. Also, the group -- the group's improvement of the leverage metrics and the solid operating and financial performance has been reflected in the improvement in the ratings assigned by Fitch and Standard & Poor's. Fitch has upgraded the corporate rating of the group to B+, up from B, also maintained the positive outlook, and Standard and Poor's also revised the outlook of the group to positive from stable so, therefore, very good support for this company. With regards to the deleverage [ indiscernible ] announced also when we presented the IRB, the Board of Directors has approved the exercise of the early redemption of the convertible bonds that was due in November this year, EUR 250 million. I will say this is a key milestone for the company that concludes the reduction of the debt that we started back in 2015, at that time the leverage company -- of the company was roughly 5.6x. And if we achieve the EBITDA target that we have announced with this conversion of the bond, the implied net financial debt ratio by the end of this year will be close to 1.2x. So that means, the low range of the initial leverage guidance that we provide for the market will strengthen the balance sheet of the company and provide further opportunities for the growth. The early redemption figure has been met, all the information has been shared with the market on the relevant fact that we announced as of yesterday, therefore, the company reduced further this production treasury stock roughly 8.6 million of shares, limiting the new issuance of shares to roughly 42 million shares that would imply roughly 10.8% of the total capital post conversion. Key dates for this process has been shared on the [indiscernible] pack that we sent to the market. Recall also important this bond EUR 250 million has a fixed coupon of 4%. Therefore, as Alfredo has mentioned, production on savings for the company of roughly EUR 2.5 million as we'll have the early redemption as we get paid the last coupon on the 8th of May. To conclude, as Ramon has mentioned, the start of the year and also more important current trading with the visibility that we have on the significant improvement on operating and financial performance give us a very good outlook for 2018. I'm very positive with the assets, I feel positive about the near future, solid set of results and also much stronger balance sheet. The good start will give us, I will say, that we are well on track and very comfortable to deliver the guidance that we have provided to the market. And now after covering the key highlights of these results, now we'll be happy to answer any questions you may have. Thank you.

[Operator]

[Operator Instructions] The first question comes from Simon LeChipre from Raymond James.

[Simon LeChipre, Associate Analyst]

Two questions, if I may, from me. First of all, would you mind give us some granularity on the current trading in your main markets? And second question is in terms of financial leverage. What is the net debt to EBITDA level you used here as normative over the medium term?

[Beatriz Puente Ferreras, Executive MD of Finance & Administration]

Thank you, Simon, for the questions. I think it's important what Ramon said, we'll have to write guidance for the full year, you remember that roughly 5% growth for the year. The trade -- what I can say that the trade for April March and April because as we said we have the impact of Easter. So it's important to see how the current trading is performing. We combined March and April to see what the impact has been. We can say that the like-for-like within Europe has performed roughly 6.1% growth, so quite strong. If we include the impact of FX on -- in Latin America, that metric will be roughly 5.1% on all in for the group. And also, if we include -- we add the repositioning, the impact of repositioning, which is neutral, roughly neutral, for the first quarter but is not for this period and also the opening [indiscernible], we'll have total revenues for the group for this period. And speaking of March and April, it's both last year 6.2%. So it's -- as you can see, the impact on the first quarter of Easter has negatively impacted the group, therefore, very good trading from the beginning of the year. Going to specific markets, not providing a specific guidance on like-for-like terms, and speaking by markets, Spain continues to be quite strong. And we see, as Ramón said, May and June -- May is a month with less bank holidays in Spain and also in Germany which is [indiscernible]. We are opening new hotels, 1 in Madrid, and we have very good expectations for that. So we see that Spain should be more maybe in the low single digits. Italy, quite strong because of the performance of Milano and Rome. So therefore, it should beat both Spanish performance. And the good -- the one that we will be pushing more the results should be Benelux in Central Europe [indiscernible] took place last year and we have very good performance. So all in, should be quite aligned with the guidance that we provide for the year. I'm speaking of Q2, okay. So that's the reason, as Ramón said, that with the good performance we have in the first quarter [indiscernible] biased, having limited visibility for May and June, that it will be biased. That's the reason we see that for the first semester, we should go above performance. Regarding also the second question, how do we see the target leverage ratio for the group. I think, in the industry, taking into account that it's a cyclical industry range between 2x to 4x, 5x is the kind of long-term leverage ratio for the company.

[Operator]

The next question comes from Guilherme Sampaio from CaixaBank.

[Guilherme Macedo Sampaio, Analyst]

So over your recent conference calls, Alfredo has been mentioning that as NH approaches its long-term leverage target, you should find other ways to create value without hurting the financial stability of the company. Could you provide further clarity of the potential actions that you could follow and how is this process evolving? That's the first question. And second, can you provide more details regarding your thought process on HNA stake?

[Ramón Aragonés Marín, CEO, MD & Executive Director]

Thank you for the question. As you know, this process started by year-end. It was -- at beginning of January, there was this filing in the stock market in the CNMV, saying that they were looking for structure. Understanding initially was -- there was going to be a very speed process. But we learned and we are not on the selling side so that's a question clearly to post to NHA but let me share my current understanding of the situation, they have the shares pledged with a Chinese bank, the Asian Bank and the [ unpledging ] process was quite cumbersome. And that seemed that it has taken longer than they expected. So our most recent news is that apparently they are getting close to having a clear process to receive the deeds from the different interested parties. But I have to say, that this is what we hear. We also hear at the end of the year that that was starting to be done by February and as a comfort to all of you, we are running the company as if this was not happening. I mean we need to keep on doing what we'll be doing, we have said. Since the very beginning, HNA was out of the board, that, that was not affecting neither the strategy nor the board decisions or the management functioning and still is the same. Regarding interested parties, having as your last part of the question, your second question, there's been several -- some people have several parties have come to us for information, and we have tried to help them understanding the business, understanding what is the strategy that we have and see what are the uses for the company. Clearly someone wants to buy a minority position. They're interested to see what is the rest of the company, what's the board thinking. And we've been trying to explain the company and the views from the board and from the management. There's been a lot of or several financial interested parties. There has come also some industrial and, as I have said, several times in the past the issue with industrial is that we'll repeat the same issue that we had with HNA today. And clearly, we see there are strong problems for the rest of the shareholders having an industrial at the board that could jeopardize future [ of the ] decisions. If I can tell you my hope is that this is solved soon but I have also to say that this is not on our hands. This is something that depends on HNA, depends on the bank that has the shares pledged. And we hope that this will not take long to be solved but that's not something that we can control. It's very important and we'll take use of this question to highlight. As you remember last year, when we had the shareholders meeting, HNA voted against all the differing points addressed to the shareholders, including the approval of the accounts, including the payment of the dividends. I don't know whether that's done without thinking in an automatic way but I would they and us, knew that it will be important that for this year that we don't have any problem if this is repeated and that we get all due support and all due attendance to the shareholder meeting.

[Operator]

The next question comes from Joao Safara from Banco Santander.

[Joao Safara Silva, Equity Analyst]

I have 2 questions. They're related. The first one is going back to the -- I mean, the financial leverage target. If we think about IFRS 16, if we think about next year, then my question is basically what would be the financial target, the net debt to EBITDA next year, if you have already -- if you can share with us a number. And if does this change EBIT where [indiscernible] than to if that is -- I mean, let's imagine it's above 2x, which I estimate it will be. Then I don't know but I would say that there's limited scope to be much more aggressive in terms of being doing buybacks or acquisitions. And this goes to my second point, I mean exactly what is the growth plan here for the future? And if you could basically touch on several things that I mentioned. First, do you consider acquiring assets, meaning acquiring brands? Do you consider acquiring real estate? Do you have the option to buy, I mean real estate assets where you have a lease contract and you have the option to buy them, and is that still a possibility? And I mean anything else that you see that you could, in some way -- I mean, do you want to direct basically the leverage going forward? If you could help me on that.

[Beatriz Puente Ferreras, Executive MD of Finance & Administration]

Yes, you are right. When I was speaking of these long-term financial target ratio, of course, it's related to only financial ratio leverage ratio as we know as of today, including the remaining leases of the company, we'll suggest, of course, we are working hard on analyzing all and be prepared for the implementation of our existing view the beginning of 2018. And we will disclose all that information by the end of this year on the accounts, on the work methodology. There are 3 different methodologies we will apply. Therefore, going to your question, I will suggest you can go and review rating agencies' reports both -- all the 3 rating agencies that has -- 2 of them has recently upgraded the group include within the adjusted leverage ratio the implied NPV of those leases. And as I said, they have upgraded the company. Of course, you will have an impact on the balance sheet of the company going forward. And also you will have an impact on P&L as the registration of the amortization -- the payment of rents we have today will be completely different from the ones that we'll have when our existing [indiscernible] will be implemented. But as I said, we'll provide full information to the markets for you to be aware of. But [indiscernible] include that within those ratios and also in all the covenants that we have as of today with the bond and also the [ assets ], that calculation has been excluded for the company in terms of covenants. We are speaking of these net financial leverage ratio. So regarding the second question.

[Ramón Aragonés Marín, CEO, MD & Executive Director]

Yes, well so this is the situation of the company where now it's totally different. We are running a step in advance and it is time to thinking any plans for the future of the company. In the meantime, we are beginning to analyze the markets, we would like to grow but under a strict profitability criteria. At an organic level, we are today analyzing a lot of projects so we expect to grow some of them in the coming weeks. But there is an important change that I would like to share with you. There are several investors right now ready to sign new deals under management contract in the main European Cities with us. And this is a totally different behavior from the investor base to NH. They trust the company and they realize that they could have greater increases in the profitability and the management model. Obviously, right now, we're analyzing 4 projects in European cities. And this will allow us to grow assuming there's risk in the future. And at an organic level, the idea would be to find opportunities in Europe that will complement our current portfolio and allow us to obtain corporate synergies. As I mentioned before, it's time to rethink the model, it's time to adopt the plan of the company to a new reality of the company. And I'm very happy to have this opportunity, it will be something that we have to work for.

[Joao Safara Silva, Equity Analyst]

Okay, may I just have a follow up on that? I mean, my objective with the question and I understand the rating agencies already considered that. But I was thinking about I mean you mentioned buybacks and also growth, et cetera. So I'll put the question in another way. What would be the level of rating that you think it's -- you want to have for NH? Do you think it's reasonable?

[Beatriz Puente Ferreras, Executive MD of Finance & Administration]

I mean the rating of the company, of course, if you analyze these pure metrics of financial leverage should be investment grade. By the way we are on way to that and it's, of course, we are working hard to get to those levels is because of the business profile that we have. But saying that, I think, there's a huge difference between the companies that will be impacted by IFRS 16, and it's very important as Ramón said, that we will focus on profitability. I mean when we shared with the market during the Investor Day the quality of our ratios, we were speaking of current ratios quite above 1.5x. That means that we have very profitable ratios within the company. Of course, we are going to be impacted by IFRS 16. But at my point when you analyze the balance sheet of the company, it is important to dig in on the quality of those ratios. And we will include full disclosure of the tenure of our leases, the profitability of those leases, what the impact would be. I mean, we'll be happy to share that information with the market as of today. But it's a complex process, and we have different methodologies that will impact the future, P&L of the company or will impact the net worth of the company. And we need to analyze what will be better for the company. So that there is no misinformation as of today.

[Operator]

[Operator Instructions] Ladies and gentlemen, there are no further questions. I now give back the floor to the company.

[Beatriz Puente Ferreras, Executive MD of Finance & Administration]

So thank you very much for attending our Q1 results. Very positive outlook for the company and hopefully we'll be able to share that with you in the next call. In the meantime, happy to follow up with the IR department any follow-up questions that you might have. Thank you.

[Javier Vega-Penichet]

Thank you. Bye.