Scandic Hotels Group AB

STO:SHOT

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to the Scandic Hotels Group Conference Call Q1 2019 Report. [Operator Instructions] Just to remind you, this call is being recorded.I’ll now hand the floor to our first speaker, Henrik Vikström. Please begin.

[Henrik Vikström, Director of Investor Relations]

Yes, good morning, and welcome to this presentation of Scandic's first quarter report. My name is Henrik Vikström, Head of Investor Relations. We will today start with the presentation from our CEO, Jens Mathiesen, followed by a financial update from our CFO, Jan Johansson, before we open up for your questions. But please go ahead, Jens.

[Jens Mathiesen, President & CEO]

Thank you very much, Henrik, and good morning, everyone. Thank you for joining this presentation of our first quarter result. We are today calling from one of our hotels, Scandic Grand Central, here in Stockholm, where we also shortly will host our Annual General Meeting.Please turn to Page 2 for a brief summary of this quarter. Development in the first quarter was pretty much in line with what we expected in the beginning of the year. We reported sales growth of just above 7% in the first quarter. The organic growth rate was 4.7%, of which growth for comparable units was 2.5%, and approximately 2% came from more rooms in operation. This was largely in line with the guidance we gave in the Q4 report.There was a positive calendar effect in the quarter as Easter was in April this year, while it was partially in March last year. We estimate that calendar effect affected our revenues positively by 3 to 4 points compared to Q1 last year, whereas the biggest impact was seen in the Norwegian business. Our adjusted EBITDA improved from SEK 115 million to SEK 160 million. We saw improved results in all our markets except for Sweden. But do remember also that the result was supported by calendar effects.I would like to highlight the development in Finland, where we saw improved results mainly due to the cost synergies in the previous Restel hotels. We did also see that the RevPAR growth was somewhat stronger for the Restel portfolio than for the average of our Finnish portfolio thanks to strong commercial focus. As we have stated before, we are aiming at reducing the gap in RevPAR between Restel and the rest of our Finnish operation over the next few years.We sold Scandic Hasselbacken in Stockholm in the beginning of the year at the price of SEK 230 million. Hasselbacken is a relatively small hotel with 113 rooms and the selling price corresponded to more than 20x the hotel's adjusted EBITDA for last year. The divestment resulted in a capital gain of SEK 182 million that was reported as a nonrecurring item in the first quarter.We have during the quarter increased our focus on our margins given that we are seeing relatively modest RevPAR growth in the markets at present. We are aiming at improving internal efficiency and to become more selective in management decisions as well as taking a closer look at the underperformers that we have in our portfolio.If you turn to next page, Page 3, you can see the market RevPAR growth on a rolling 12 months basis in the Nordic countries. The picture looks pretty much the same as it did one quarter ago. RevPAR growth has gradually come down and we are now seeing low single-digit growth in all the Nordic markets. Demand is generally holding up well, but we are somewhat affected by increased capacity growth in some of our key destinations. In the beginning of 2019, we have seen increased capacity growth in Oslo and we expect to see a significant increase in Copenhagen from the latter part of this year. So that is likely to have a negative impact on RevPAR.Please turn to Page 4. Here you can see a picture of the market balance in Sweden. The light bars show development in the last 12 months, while the darker ones show year-on-year development for the first quarter. We have seen capacity growth of around 2% in Sweden both in the quarter and in the last 12 months, while demand is growing at a slightly higher pace. This has resulted in a slight increase in both occupancy and rate.The market balance in Stockholm, Scandic's most important destination, has continued to improve with RevPAR growth of more than 4%, driven by healthy underlying demand combined with relatively limited capacity growth. So all in all, a relatively balanced market situation in Sweden at present.Please turn to Page 5. On this page, you can see how the market balance in Norway has developed in the quarter and the past 12 months. The capacity growth in Norway is approximately twice as high as in Sweden. It was up by 4.5% in the quarter, partly explained by relatively large increase in Oslo. RevPAR in Norway was up by 6% in the quarter, mainly driven by higher occupancy. But that growth was fully explained by calendar effects as Norway is the market that has the highest impact from Easter.Please turn to next page, Page 6. Here we have a table showing market RevPAR growth in the Nordic countries both for the quarter and for the first 4 months of the year. The difference between the 2 is to a large extent explained by Easter. So the numbers for January to April is a better indication of the real underlining market development. As you can see, market RevPAR growth has basically been around 0 in the period, with a small positive number in Finland and Norway, and slightly negative in Sweden and Denmark. You can also see that Norway, as usual, had the biggest calendar effect, while the impact was much smaller in Denmark and Finland.If you turn to next page, Page 7. On that page, you can see our pipeline for the coming years. We have 3 planned openings during this year. We will re-open Marski in Helsinki as a new signature hotel in June after a complete renovation and we will open Scandic Falkoner in Copenhagen in the third quarter, which is a conversion of a hotel that was -- that has been closed for renovation for a couple of years after we took it over from one of our competitors. Copenhagen and Helsinki are our most important destinations in the pipeline with 3 planned openings in each city for the coming years.Also, we have 2 hotels in the German market in our pipeline: one in Frankfurt, located near ECB headquarter, and one new hotel in Munich. Also, you have -- you can see that we have ongoing extensions of almost 600 rooms. This number has increased as we recently announced extensions of 2 Norwegian hotels in Oslo and Hamar in relation to lease extensions.In total, we have a net pipeline of 14 hotels with 5,570 rooms, which corresponds to around 11% of our existing portfolio. The gross pipeline consists of 16 hotels and close to 6,000 rooms. The difference is explained by 2 exits, of which one was the divestment of Scandic Lahti that was announced in April. That was part of the conditions of the Finnish Competition and Consumer Authority for the acquisition of Restel.With that, I will, as usual and Henrik mentioned, hand it over to Jan, who will take you through our financial part of the presentation.

[Jan Johansson, Chief Financial Officer]

Thank you, Jens. Yes, we have another quarter with positive development. We continued to grow the company, to increase the results and also to improve cash flow.And with that, I think we should flip to Page 9, where we have our most important operational key ratios to disclose. That is our total RevPAR, which you can see was up 2% for the group in quarter 1, impacted positively by the late Easter. And the effect, as Jens disclosed, is especially significant in Norway with an approximate effect of 6%, around 3% in Sweden and circa 2% in Finland. And why we have this Easter effect is obvious. It's due to that you have lower corporate activity in those weeks where you have the Easter weeks.And I think our RevPAR development reflects the market very well. I think it's reasonably well for Sweden and Denmark. We might be slightly behind in Norway and Finland. You can also see that total RevPAR is slightly below our RevPAR like-for-like numbers due to that we have some hotels being in ramp up phase. The exception is the German operations with a new hotel in Frankfurt actually then contributing to positive RevPAR development. If we then isolate -- try to isolate the calendar effects for the first quarter, the underlying RevPAR development is marginally negative for January-March.If we then turn to Page 10, where we have our sales analysis. You can see here that like-for-like sales was 2.5%. That is slightly higher than our RevPAR development and that is explained by better meeting business. Adjusted for calendar effect, our underlying like-for-like sales was again slightly negative. We have a strong development in other Europe. That is primarily explained by the German operations, where we had a 5% like-for-like growth. More hotels in operation, more rooms in operations contributed with 2.8% to the sales growth. And you can also see here that the total sales was up 7.3% supported by positive FX effects, currency effects following the weaker Swedish krona.And then on Page 11 we disclose development for the different segments we are having. And first as to say that here we exclude any effects from financial leasing. I will come back to those IFRS effects in a while. For the group, you can see that adjusted EBITDA increased with SEK 45 million to SEK 160 million. That is a significant uplift of 40%. In last year's numbers, we had a gain of SEK 7 million from electricity derivatives that was posted as a group adjustment. And if you isolate that, you can see that line central costs and group adjustment is more or less unchanged with last year.We improved margins from 3.0% to 3.9%, and a big contributor to that was obviously Restel synergies. They are highly visible in the result in the Finnish segments here. You can see that the result here in Finland increased at 43%. And taking out Restel synergies is obviously a big explanation factor to that. We also had a good profit development in both Germany and Denmark, as you can see here. Norwegian numbers are positive and they are especially impacted by a strong development in Northern Norway. Of course, in addition, we also have a positive volume effect due to the Easter, which we have talked about. But we'd like to highlight then the very positive development in Northern Norway, driven by leisure primarily. Obviously, we also have negative effects in Norway, with higher hotel capacity in Oslo and Bergen as well as that we have a few hotels being in ramp up phase.And with that, we turn to next page, and that is our cash flow and financial position at Page 12. You can see it's many numbers on this slide here. First, I would like to mention that Q1 cash flow is normally seasonally weak. It's this year also. But you can also see here the free cash is SEK 300 million better than last year. SEK 240 million is explained by the proceeds from the sale of Hasselbacken. But we have also paid SEK 180 million in relation to the tax dispute we're having in Finland. The net of these exceptional items are SEK 50 million-plus, leaving SEK 250 million to be explained by better-adjusted EBITDA, improved working capital and lower investment level. Despite, as I said earlier, a seasonally weak cash flow, our net debt-to-adjusted EBITDA is maintained at around 2x EBITDA, giving us a good headroom for future growth initiatives.And now it's time for IFRS 16, if you flip a page down. And we would now try to explain these huge effects on this new accounting treatment on the reporting. This recommendation impacts the accounting treatment of the fixed and guaranteed part of our rents. You might know that in total we have rents of around SEK 4.8 billion a year, our single biggest cost item. Of that, SEK 3.2 billion is fixed and/or guaranteed rents, and that part is then impacted by this new accounting treatment.For Q1, the corresponding amount is SEK 778 million, i.e., 25% of the full year, which is quite normal. And this is splitted into depreciation of SEK 571 million, as you can see here, and also kind of a phantom interest component of SEK 274 million. After tax is a quite significant negative impact on that result of SEK 53 million. But this is very much in line with what we said earlier in Q4, where we communicated that we had a full year estimate of these effects of around SEK 200 million negative on net result.The reason why this negative impact occur is that we have had a recent strong growth in our hotel portfolio boosted by acquisitions and so on and the accounting treatment according to IFRS means that we are early in the depreciation of these rent agreements, which means that we have a quite sizable interest component in our accounts, which will diminish over time. So theoretically, if we stay with current leases, this effect would be off the 25. It would be positive.Next page, at Page 14, we have the balance sheet effect on the same theme, where you can see that we have a right-to-use asset capital life of SEK 23.5 billion in the balance sheet and a corresponding leasing debt of SEK 25 billion. Having said that, important to underline that IFRS 16 implementation will not mean that we will change the financial objectives of the group. This means that adjusted EBITDA will stay defined, excluding financial leasing, and net debt will stay defined, excluding IFRS 16.And with that, we're turning to Page 15, where we have a reconciliation between reported earnings per share and underlying earnings per share. Of course reported earnings per share is significantly impacted by IFRS 16 effects, but also we have capital gains this quarter and last year we had integration costs for Restel. If we just isolate the effects from finance leasing and the effects on -- on EPS on that, that is for the quarter SEK 0.51 per share, on full year this means around SEK 2 per share negatively.Items affecting comparability has a positive effect after tax of SEK 1.66 per share this quarter primarily then arising from the capital gain of the divestiture of Hasselbacken. So if we both adjust for finance leasing and items affecting comparability, we see here from this scheme that our EPS has improved with SEK 0.44, up to minus SEK 0.29 per share.And with that, I leave the word back to Jens.

[Jens Mathiesen, President & CEO]

Thank you, Jan. We now turn on to the final page of our presentation. As we have shown, we estimate that our like-for-like growth -- the revenue growth has been slightly negative in the first quarter if we adjust for the calendar effects. We do not foresee any significant changes in the trading conditions in the coming quarters. For Q2, we expect sales growth for comparable units of minus 2% to minus 3%, with an estimated negative calendar effect of around 3%. So for the first 6 months of the year, we expect like-for-like sales growth of between 0% and minus 1%, and more rooms in operation expected to contribute with around 2% to our revenues.We have increased the tempo in our work towards improved efficiency in order to protect margins in a market with limited underlying growth. Scandic has, as you know, a scalable business model, but need to work on becoming more selective in our management priorities, a job that we have already started. Also, we are now looking more actively at the parts of our portfolio that are not performing financially.Our portfolio has basically doubled since 2013, including 2 large acquisitions, and we are putting more attention on the tail of our portfolio than we have done in the past. This is not a quick fix, but we need to evaluate all options for the hotels that are loss making despite historically high RevPAR levels.We continue our commercial focus for the Restel portfolio. We are done with the integration and the hotels are now part of Scandic's distribution system. We saw some promising signs in the first quarter and we hope to see a gradual positive impact from that onward. In a slightly longer perspective, we realize that we need to find ways to strengthen our position among non-Nordic customers, which is likely continuing to be a growing segment. And finally, we must of course make sure that we evaluate our growth opportunities both in and outside the Nordics.And with that, I hand it back to you, operator.

[Operator]

[Operator Instructions] Our first question comes from the line of Karl-Johan Bonnevier of DNB Markets.

[Karl-Johan Bonnevier]

I wonder if you could start off discussing a little bit the margin contraction we saw in the Swedish operation in the quarter? And given the positive RevPAR and the efficiencies, I saw you talked about that you've not been able to fully compensate costs. How do you see that ongoing and what is driving the operation? What kind of efficiency opportunities do you have?

[Jan Johansson, Chief Financial Officer]

Yes, I think first and foremost there -- I think when you look in the margin contraction there, I think it's -- when you look through the portfolio, it's not a general theme. I think that there are certain regions where we have -- I mean, if you take Gothenburg, for example, it was very, very strong event calendar last year. It was not the same level of event this year. So obviously, that has impacted occupancy level to a certain extent and hence also of course gross margin. So there isn't so that we can say that we have a general problem with margin contraction [ this year ] in Swedish operation. That's one part of the answer.The other part of the answer is of course that we constantly look through improvement opportunities in the operations, not only in Sweden. And I think we have worked through a couple of areas here where we see that we can do better here. And I think also to summarize the Swedish discussion, I think one area where we see an even improved market balance is actually Stockholm, where -- which actually contributes also, again, very ably to a good development in RevPAR. And that is extremely helpful, because that is our biggest region in Sweden. And I mean, if we go back 1 year, we had a totally other discussion about Stockholm.

[Karl-Johan Bonnevier]

Yes. So if I sum you up, Jan, in the right way, you can say that what impacted Q1, which always is a small quarter for you -- but looking at Sweden in Q1, it was really related to what you can call temporary issues. That has nothing -- nothing new that is happening underlying, so to say.

[Jan Johansson, Chief Financial Officer]

Exactly so. Exactly.

[Karl-Johan Bonnevier]

And when you look at the focus areas of margin and internal efficiency, given the kind of market outlook you give what kind of -- it's a low hanging fruits in these areas when you look at the -- Jens, now when you are taking charge of it.

[Jens Mathiesen, President & CEO]

Well, I -- you can always say, look at the -- some are maybe more low hanging than others. Of course, it's not low hanging to solve if you have loss-making hotels where you have commitments with long leases. But we need to have a conversation and look around some of these because we do have some hotels that has a negative impact. But when it comes to operational-wise, there's always things you can do. And also, we sometimes forget that 1/3 of our total business comes from the F&B area. So food and beverage actually stands for 1/3 of the total business. And we do have some areas within F&B that we do less profitable on versus other areas. And those areas we have initiated already now to focus on.

[Karl-Johan Bonnevier]

And when you look at the portfolio management, out of the 270 hotels you have in the portfolio, how many would you say are prime targets for doing this? I guess the tail shouldn't be more than 10% of the hotels. So what are we talking about?

[Jens Mathiesen, President & CEO]

No, but we are talking about less than 10 -- we are talking about approximately 20 hotels that we think is -- in our perspective, you can say -- call it underperforming, where -- but in that portfolio, we also see actually positively that we have hotels that is running out in the coming few years. So we will leave a few of these in the coming years. And then of course we need to have some dialog both internally and with the landlords, some internal discussions on how can we, let's say, bring them into profitable levels or more profitable levels. And some of them, we need to have a conversation with landlords on how can we renegotiate the deal.

[Karl-Johan Bonnevier]

And finally from me, looking at these focus areas, you obviously highlighted also the lesser and non-Nordic customer demand. Is that really why -- because when I look at the market growth for the moment, obviously demand looks very solid when you look at those kinds of numbers. But it is those items that are driving that growth and you feel that you need to refocus on those segments more?

[Jens Mathiesen, President & CEO]

It's of course always a way of prioritizing as well. I think you all know that Scandic is extremely strong in business through own channels. So our, let's say, percentage of business from, for instance, the online travel agents is much lower than some of our competitors in the market due to simply the fact that we have a higher percentage coming into own channels. So of course when we see now a growing international sales, we are adjusting some of these partnerships and work with the potentials of securing that we get our share of that business as well. But we have really been strong in own channels, and through that, also paying out less commissions I think than many of our competitors in the market, which is also positive. So I think we have a quite controlled environment then. And now we need to look more into how we secure that we get our share of the international growth.

[Operator]

And our next question comes from the line of Carina Elmgren of Handelsbanken.

[Carina Elmgren, Research Analyst]

I have 2 questions. One is regarding the margin increase in Finland of roughly 2 percentage points. How much of this would you say is due to calendar and how much is due to synergies with Restel? My second question would be regarding Sweden and maybe the slightly weaker than expected RevPAR growth, although Stockholm was quite okay. I mean is it also in Gothenburg that you see weak RevPAR growth or are there any other locations?

[Jan Johansson, Chief Financial Officer]

Yes, I can start with Finland. Of course there are positive calendar effects. However, they are not that big in Finland if you would relate and compare them with Sweden and Norway and so on. So I would say that the magnitude of the positive effects we see in Finland is improved operations, including taking out costs in relation to Restel. And those -- they are on 2 levels: both what we have done as part of the integration of the head office -- that's a quite clear cut synergy. But of course we also see that we have improved key ratios and so on in the hotels which are now belonging to the Scandic family. So I would say that the vast majority -- it's very hard to calculate exactly what's the calendar effect, but that's a minor effect in Finland.It is -- but I think with relation then to Sweden -- I mean, there are obviously a scattered picture in relation to RevPAR and so on. Stockholm is solid as we see it, especially the city center of Stockholm has -- it's solid the demand development. There are areas in Stockholm circle with more capacity and so on putting pressure on RevPAR. There is additional capacity in Malmö putting pressure on RevPAR, as I mentioned before. It was a strong event -- calendar last year in Gothenburg in the first quarter. However, looking forward, we don't see any big changes in the demand pattern. I mean there are some reasons actually arguing for a strong leisure summer at least in this region with the weak currency and so on. So we have no doubts in terms of continued demand growth for Sweden.

[Carina Elmgren, Research Analyst]

Okay. And if looking into the coming quarters in Finland, would you expect similar kinds of margin increase with respect to Restel? Or could you maybe quantify a little bit how much synergies you could see going forward?

[Jan Johansson, Chief Financial Officer]

The main part of the synergies -- synergy extraction will be visible through the first 6-7 months of this year as -- and -- because that's where we have the weaker comparisons, so to say. We started to take out most of the costs in the summer time last year. So I expect Q2 to be another quarter where we will have the quite visible synergy extraction effect into the results. And those effects will continue to diminish throughout the year. However, the pressure to improve RevPAR will remain in those units. So we will move from more cost synergies into more top line synergies during the year, is the big picture, so to say.

[Operator]

[Operator Instructions] As there are no further questions at this time, I'll hand back to our speakers for the closing comments.

[Henrik Vikström, Director of Investor Relations]

Okay. Thank you all for listening in. We look forward to hearing from you soon again. Bye-bye.