Scandic Hotels Group AB

STO:SHOT

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, welcome to the Scandic Hotels Group Audiocast Teleconference Q2 2021. Today, I'm pleased to present President and CEO, Jens Mathiesen; and CFO, Jan Johansson. [Operator Instructions] Please note this call is being recorded. Speakers, please begin your meeting.

[Jens Mathiesen, President & CEO]

Thank you very much and good morning, everyone. This is Jens Mathiesen speaking. Thank you for joining this presentation of our second quarter report. As you all may recall, we published a market update only 1 month ago where we said that we expected occupancy to be at least 35% in June and that we expected July to be better than July last year. We can now, in this call, confirm that we have seen improved demand in all our markets during the second quarter and also that the increase accelerated towards the end of the quarter. So after a very weak start to the year, our occupancy was around 20% in April, 25% in May and it ended at around 60 -- 36% in June. The increase has been quite across the board, with relatively similar development in all the Nordic countries and also with higher demand at almost all destinations, both on weekends and weekdays. But the better demand -- our EBITDA loss was significantly reduced compared to the first quarter, and also our cash outflow was relatively limited. Of course Jan will comment a bit more on this in a few minutes. And based on this development so far in July and the current booking business on the books, we also expect occupancy now to be around 55% in July, which is a level where we also expect to be able to generate positive cash flow. If you please turn to Page 3. This shows the monthly market occupancy in all the Nordic countries. We started this year, as you know, very, very low levels, and there has been an improvement since then on the back of the reduced restrictions. Development have been relatively similar in all the countries lately, and there was a clear improvement in June. And based on market data occupancy, this was between 35% and 36% in Sweden, Finland and Denmark in June, while it was just above 40% in Norway. If you turn to the next page, Page 4. Here, you can see Scandic's 7 days rolling occupancy until Tuesday last -- sorry, Tuesday this week. There has been a continued increase during the first 2 weeks of July, and occupancy is now around 55%. The main driver has been domestic leisure, where we are well positioned right now and we focus on strengthening our position even further. And Scandic has, ahead of the summer, launched attractive offers for families and was the first Nordic hotel chain actually to launch a multi-booking function online, which makes it possible for travelers to book or to buy different hotel space in just one booking. There are still some differences in the restrictions between the countries, but societies are opening up and governments have communicated plans for gradual phasing out of the restrictions, which the target, of course, that they will more or less begun in the early autumn. To the right, you can see that Norway is still leading the way with an occupancy level that is around 60% at present. Apart from the domestic leisure, we do have some help from quarantine business, though, in Norway right now. I also add that there has been a clear improvement in our German hotels. They have still struggled quite a lot with tough restrictions during the first half of the year, but occupancy has almost doubled there in the past month, and the run rate now is approaching 40%. Please turn to the next page, Page 5. This one shows Scandic's occupancy from the beginning of 2019 until Tuesday this week. We are currently, clearly, above last year's level, but we have still a long way to go until we reach the pre-pandemic levels between 70% and 80%. We expect our occupancy for July to be around, as I said, 55%. And based on the current trend, it is likely that we will enter August with a level of around 60%. One important reason for the increase in July versus last year is the higher activity level, which we see in the large cities. And thanks to more entertainment options, including the now open amusement parks and easing of restrictions and gathering in restaurants, these destinations account for quite a considerable part of our total hotel portfolio. So this is very important for us, as also mentioned earlier. But even if this summer will be better than last year in the capital cities, occupancy is still far from what we consider to be normal levels. We expect demand to come mainly from domestic leisure during the remainder of the summer season, and we expect more corporate activity from the early autumn and onwards. We have seen an increase in booking requests for the fall, but the corporate customers are still acting with extremely short lead time, which makes it difficult to assess the pace at which business will pick up after the summer. And we will probably have to wait until, I think, early next year until we see international demand coming back significantly. We are seeing some international guests coming in, but they're still on low levels. On Page 6, you can see Scandic's occupancy in the capital cities in the past month. It has increased lately, and the run rate is currently around 30% in Helsinki, around 37%, 38% in Stockholm and Copenhagen, and 44% in Oslo. In a normal year, occupancy should, during the summer months, be at least 75% in these cities, so there's still massive room for improvement here. But it is going the right way. Please turn to Page 7. This is our pipeline at present that now amounts to just above 3,600 rooms, which is a little less than 7% of the total portfolio. We opened 3 new hotels in the past quarter, 1 in Helsinki, 1 in Copenhagen and 1 at Landvetter Airport just outside Gothenburg. So the number of rooms in operations have increased by around 1,200 rooms, and that was a corresponding decrease in our pipeline. We have 2 hotels that are scheduled to open during the fourth quarter of this year. And most of the remaining pipeline you see on the list is planned to open in 2022. I think with that, I hand it over to you, Jan, for some financial comments on the financial development.

[Jan Johansson, Chief Financial Officer]

Yes. Thank you. Thank you, Jens. This is the sixth consecutive quarter with negative result and cash flow. And of course, it's still a bad result in that cash flow. But we also see a robust improvement right now, and that is strongly correlated to the occupancy development. As Jens mentioned, coming into Q2, we had a weak start to Q2 with some occupancy numbers of some 20%. However, we ended up here in June with numbers around 40%, giving in a total average of 27 here and coming into July in a much healthier way. On the table on Page 9, you can see here a strong improvement versus corresponding quarter last year. However, that quarter was probably the worst quarter in Scandic's history. It doesn't make so much sense to compare with it. If we instead look into the sequential development and compare a little bit with Q1, we lifted revenues with some SEK 700 million. We lifted profit -- or our adjusted EBITDA was some SEK 400 million. So this shows that when we get more sales on top, we can convert that to approximately [indiscernible] probably even more into some adjusted EBITDA. There are still one-offs in the results. We do have and have put into Q2 numbers state aid -- direct state aid of around SEK 200 million. You can see here SEK 40-plus million in Norway, and [ mainly ] also both in Germany and Denmark in total SEK 161 million. We also have the rent discounts. You remember, we talked about that we achieved rent discounts from landlords of around SEK 900 million in total in the end of last year. A part of that, if I recall right, SEK 180 million, something like that, was attributed to 2020. This year, we expect close to SEK 500 million coming into the numbers. So we will also have the rent discounts second half of this year. However, probably not to the same extent that we have had the first half. So that number will be a little bit lower then. And I think that with that, I think we go to the cash flow, and that is still negative, but it is a significant improvement compared to the first quarter. I think we had a negative SEK 1 billion. We have a cash -- underlying cash bond of around SEK 350 million during the worst months during this winter, and you can see that has come down significantly now. We have a much more moderate negative number of SEK 200 million here. Although with support from state aid, it's around SEK 300 million. That was some money which has come in, which was recognized in the accounts in Q1, so SEK 300 million. We have also extended tax credits with SEK 50 million, which have to be repaid eventually by 2022. You can also see a very strong positive working capital movement, and that's a reflection of the increased momentum now in the business, individual business paying upfront, no invoicing and money into the account immediately. And then we have the deferred expenditures in terms of salaries and paying suppliers. And also lower upfront rents due to the fact that the business activity have been so low. So that we will probably continue to have a favorable development of working cap here in H2.CapEx is controlled. We are still monitoring cash flow now, delaying what we can delay, only satisfying the agreements which we are having. We are aiming at keeping that below SEK 600 million for the years now to try to restore as much as possible here. Net debt SEK 4.4 billion and available liquidity on a healthy level of over SEK 2 billion at the end of the quarter there. Then I think it's -- we need to take a few words on the financial net. It's a high negative number of SEK 438 million, and that is on Page 11. You can see here, IFRS 16 effect, which is -- that is paid not in the financial net, that is paid through the rent. So excluding IFRS 16, this is a part of the rent then. So if we take out this SEK 300 million, we have a financial net of SEK 134 million. However, we don't pay that. A part of this is the convertible bond. We have interest expense on that only 11% on 78% of that bond, that corresponds to [ 1.2 ] . So you should expect in the income statement a little bit more, [ SEK 31 million ] in quarters to come, but that will be a stable number as this bond is denominated in Swedish krona. So it will be [ at accounts ] -- and the counter account is, of course, that we then increase the value of the bond over the current [indiscernible] released then in 3 years. In addition to that, we had some negative timing difference on the bank loans. That has -- it's always like that you don't pay actually what your expense from time to time. Underlying, you should expect, if you assume a constant net debt -- but that's a theoretical assumption. But anyway, if you do that, you should calculate with interest expense of a little bit more than 5% on that net debt. So yes, then you would arrive on a number which is probably some [ SEK 60 million ], something like that, per quarter here going forward. We have paid the interest here also in the cash flow, which is SEK 112 million, and that includes the timing difference here, which we refer to in this table. One extraordinary item here in the cash flow this quarter was the fees to the banks when we prolonged the bank agreement, and that was SEK 50-million-plus bill which we are able to pay there. So that's the reason why this paid financial items of SEK 171 million that saw a little bit of a one-off nature. And going forward, you should calculate with a much smaller amount, maybe SEK 60 million, SEK 70 million, something like that, depending on the development of the cash flow. Very good. Then I would like to repeat, and I think that's important to remember when you judge the sequential development of us, we have already guided here for July. We will take another huge step when it comes to the occupancy development. This is the way I think you should look on us now, taking that step. So when we take -- when we make 1% unit change in occupancy, that should give us between SEK 10 million and SEK 50 million more in both adjusted EBITDA and cash flow. Maybe initially, maybe we're a little bit higher in that interval. So maybe SEK 15 million is more accurate when we make these short moves. But I think longer term, maybe calculate more closer to 10. We believe that we have the possibility to reach breakeven on a 40% occupancy. This will vary between the countries. I think, for example, Norway will make it on a lower level. I know that Norway will make it on a lower level. Actually we've already seen that. It will be a little bit higher in the countries where we have more hotels in the big cities. So average then, you have also seen from presentation of the big cities lagging a little bit behind that. So maybe that number is 41, 42, something like that. Cash flow, we believe that maybe we can actually reach that below 50%. We have a good working capital development right now, which is helpful in that respect. So maybe this is a little bit -- maybe we should reach that on a lower occupancy level than 50%. This will -- we will have a test of that now in July here. So we will report back on that in Q3. And then finally, just a reminder of the IFRS accounting effects. It's a big difference on the net result here when it comes to IFRS effects this year, and that is primarily due to that we have this very high rent discounts this year, close to SEK 500 million, a little bit less than SEK 500 million. Because in the IFRS accounting, you cannot take those upfront as we do in the normal IFRS. In fact those will be spread over the remaining life length of this agreement. So that makes [indiscernible] a quite big difference here in the accounts. You might also recall that we extended some of the contracts when we got these rent discounts and that also constitutes a difference of cost here. Theoretically, the negative impact will go away over time, and it should be positive from 2022 assuming a constant hotel portfolio until that time. That will obviously not happen, so there will be changes to that. I mentioned already the convertible bond, which was launched in April. Also, that is accounted under IFRS. There is an 11% theoretical coupon which is not paid then actively to the debt part of the bond, and that debt part is 78%, SEK 1.2 billion, which is then taken in the income statement. And the counter account is that you increase debt then until maturity. We will have a dilution also. When EPS becomes positive, there will be a dilution of some 18%. But when EPS is negative, there is, of course, not a dilution. We cannot share the negative with the convertible bond holders. I think that this concludes my part. And with that, I hand over to CEO, Jens.

[Jens Mathiesen, President & CEO]

Thank you, Jan. And I'll also do this fairly shortly. We have already said it before, Scandic is well positioned with a broad mid-market offering, with high, high focus on domestic and Nordic customers and also a very high customer satisfaction. And this is actually both within leisure and corporate segments. We are entering this recovery with a very low cost base. Like Jan also just mentioned, our costs are significantly reduced compared to the pre-pandemic levels. And we have done considerably, and I would say, sustainable cost reductions, especially in group functions and in country support offices that we will now benefit from them. So we have clearly improved our ability to generate good margins when the market now starts to stabilize more. With that, I hand it over to the operator and open up for the Q&A.

[Operator]

[Operator Instructions] Our first question comes from the line of Adela Dashian from Handelsbanken.

[Adela Dashian, Analyst]

This is Adela Dashian from Handelsbanken. I have a couple of questions, but let's start with the outlook question. And then obviously, we all know that current demand is driven by domestic leisure. And you did mention in the report that you plan on strengthening your offering in this segment. Could you explain what exactly you mean by this? Are you talking about a shift in segment mix in the future as a result of the pandemic? Or do you still expect your exposure to corporate guests to remain the largest segment?

[Jens Mathiesen, President & CEO]

Thank you for that question. I think it's a very good question. I think sometimes everybody tend to forget a bit that all, I would say, hotel change are extremely dependent on the mix between corporate and leisure, and so are Scandic. So we have equally almost as many leisure days as we have corporate days in the year if you take everything into account. And therefore, Scandic has also a history where we are very strong in the leisure segment towards couples traveling and very strong within families traveling both during holiday periods and weekends. And so we are strong in this segment. But of course, right now, since we are lacking the international part of the business, our focus, when you talk about the commercial initiatives, have been a lot on focusing on getting in the families and people to travel during this summer, both when it comes to the domestic traveling but also some intra-Nordic traveling. We have seen also that some international guests are actually coming to the Nordic. I've seen German couples here in Stockholm during the last week. So more and more Germans and international people have, of course, started to travel but it's on a very low level. So our focus has been on getting the group on the leisure part, especially for the summer with the focus on domestic and intra-Nordic. So it has always been a focus, but of course, right now, it's even higher.

[Adela Dashian, Analyst]

Okay. So it's more of a current focus and not a strategic shift to focus more on domestic leisure or leisure in general.

[Jens Mathiesen, President & CEO]

I think there are some strategic changes that we definitely have because we think that if you look at the last years, leisure has outgrown the corporate on a yearly basis. So if you look at the last 10 years before the pandemic, leisure was around 6% in average versus the corporate, which was around 3%. And I think in our new portfolio, and you're saying a lot of the new hotels coming in, we have much more leisure focus on them. So we just opened one hotel in Copenhagen with some spa facilities, and we opened also a central hotel in Helsinki. They are much more capable of attracting leisure business also during mid-week and off-season periods. So I think we are more focusing to really get our grips around all the growing leisure business also onward. So definitely, yes, you will see a small change in securing that we are also very open for leisure in all periods of the year.

[Adela Dashian, Analyst]

Interesting. All right. On to your corporate [ gap ], and you did mention in the report that the meeting requests are increasing, but could you also give us some more context around this. Like what type of meetings are you seeing and what type or what kind of corporate customers are making the bookings?

[Jens Mathiesen, President & CEO]

Yes. I think also that, of course, like we see, and it is not because we don't want to tell you, but really, the visibility and the numbers are still low when we look at the autumn, and it's still coming in very late. When we talk about meeting business, last year in Q3, the fact was that we had a lot of restrictions on the number of people that could gather, and those are lifted, meaning that now we can actually gather hundreds of people in a big scene or event or a big meeting, which we couldn't do in Q3 last year. So that's maybe one of the most important things that have changed. Last year, you could only gather in many places up to 10 people or so, and therefore, we had a lot of cancellations of -- also what we drive big musicals in one hotel in Copenhagen for 2,000 people. That was canceled during Q3 last year. And this is planned to reopen again, these musicals, during September in the coming quarter. So yes, we see that bookings with more people are being booked. And we also see that less cancellations are coming in versus what we saw last year due to this. It is still small numbers, and therefore, it's difficult to really predict exactly how this will land. But we do have a lot of request also for the autumn, which I think is very positive. It seems that businesses are really keen on starting to meet up with their team members and with their customers again. A lot of things have been postponed again and again, so it seems that a lot is expecting this to happen during the autumn.

[Adela Dashian, Analyst]

Right. So probably a better Q3 this year than last year according to...

[Jens Mathiesen, President & CEO]

But that's -- I would say, that's for sure. I think for 2 reasons, like both me and Jan just mentioned, I think the leisure period is stronger this year than it was last year. So we moved into this quarter much stronger than we did last year. And we also see that we are less worried about, let's say, the cancellations of the meeting bookings that are on the hooks because of, right now, we -- unless we get a new wave coming in and new restrictions on us, which nobody really can predict. But right now, we do have lower restrictions or less restrictions than we had last year, and that is opening up for more business in -- especially in the meeting segment.

[Adela Dashian, Analyst]

Right. All right. Two more questions for me, and then I'll hand the word over to someone else. The first one is, obviously, there's been a European championship and games have been held in Copenhagen. Did you see a temporary spike in demand as a result of that?

[Jens Mathiesen, President & CEO]

Yes, we did. And you also saw unfortunately, we were beaten by the British. But Denmark now -- I'm Danish, and I follow this myself as well, but that's the way it was. No, but we did see actually also a lot of international guests coming to watch their teams. And then I was really -- there was a lot of -- you can imagine, especially in Copenhagen, there was a lot of talk around why do we still have restrictions on opening bars when you could have like tens of thousands people gathering in the Central Square with a big party. And of course, that made a lot of focus on also how much spread do we see after these gatherings. We do see some spread of the virus, but it is now with very young people. And then the most part of the adult population is vaccinated. So it is much more under control with the elder or, let's say, us who are a bit elder. And -- but yes, we did see people being really prepared to travel once the possibilities are there, and that's positive.

[Adela Dashian, Analyst]

Good. Finally, on the deferred tax liabilities that you've incurred during the pandemic or throughout the pandemic. Do you have the total amount of this? And when do you expect this to be repaid?

[Jan Johansson, Chief Financial Officer]

SEK 0.5 billion probably during 2022 in the first half. But we don't have any definite date on that. But in our modeling, in our calculation, in our planning, we are -- we have that as a preparation. So first half '22.

[Adela Dashian, Analyst]

And sorry, what was that amount?

[Jan Johansson, Chief Financial Officer]

SEK 0.5 billion. SEK 500 million, yes.

[Operator]

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

[Karl-Johan Bonnevier]

Just to continue on the tax deferral. Is there any state aid that you are still waiting to be paid out, so to say, that from a cash flow perspective?

[Jan Johansson, Chief Financial Officer]

We have, of course, applied for it. We haven't -- but I don't want to guide you and give any expectations here. If it comes, it will come. If it's not come, we have to deal with it here. So -- but of course, as the situation is right now with improved occupancy, we cannot expect support. What I'm talking about is retroactive opportunities for the difficult period, which has been -- so there are a number of applications, which has been sent in there. So we'll see what's happened with that. But I don't want to create any expectations here around us that will give anything. If it comes, it's icing on the cake.

[Karl-Johan Bonnevier]

So the SEK 500 million net outflow, that's a gross negative if you put it like that, but there could be some mitigating factors to it coming from other sources.

[Jan Johansson, Chief Financial Officer]

Yes. I mean what -- we will gain the support, which we will continue to have right now is, of course, the rent discounts during the second half because that is agreed and that will support the result. But otherwise, I think it will be highly, highly, highly correlated to the occupants.

[Karl-Johan Bonnevier]

Excellent. And looking at the demand recovery going on for the moment. Obviously, the capital region, as you pointed out, is lagging and then should be helped by events coming back. But when do you see or believe that we could see, say, capital regions coming back to leading the occupancy levels again? Is that a question already for the second half of this year? Or is that -- do we need international demand to come back to really get back to that?

[Jens Mathiesen, President & CEO]

I think a very good question also. I think if restrictions now are lifted, we might see that the occupancy levels will increase in the autumn due to the corporate business. And then some of the major cities are normally not that strong, you can say, on domestic leisure. It is not a lot of Swedish that actually go to Stockholm during the summer. It's not a lot of Danish go to Copenhagen. So normally, driven by some international or Nordic traveling. So I think during the autumn, we might see an increase in occupancy levels in the capital cities. And then I think for international leisure, the big thing will be, of course, next year when we talk about the capital cities. So I'm sure that next summer, if we are all away from this pandemic, we'll see much larger occupancy levels next summer driven by the, let's say, the international leisure coming up. But for the autumn, I think there's a possibility that actually corporate could drive the occupancy growth.

[Karl-Johan Bonnevier]

Excellent. Now I guess everything will ease when you start to get events going at least in the capitals as well. And final -- sorry?

[Jens Mathiesen, President & CEO]

Just to say, you mentioned that we all know that a lot of these amusement parks and event scenes, they are also extremely keen on getting this business back. We know that artists haven't been on the scene and stage for more than a year. We know that a lot of these entertainers, they want to start going on tour and they want to have concerts again. So once this is possible, we actually think that, yes, this will start in, and then that will drive a lot of, let's say, reasons to go.

[Karl-Johan Bonnevier]

Perfect. And just one final from me as well. Looking at, say, the shift that you've discussed with the previous questions and looking at, say, leisure demand probably being even a bigger business proposition for the future than it has been historically. Has it made any implications for how you want to drive your portfolio management of the rooms that you have and looking for what kind of hotels you would be looking for in the future when you start to expand the franchise again?

[Jens Mathiesen, President & CEO]

Yes, yes, absolutely. And we are much more focused on securing that -- you can say that you have availability for families and family rooms or that you have more connecting doors between double rooms and et cetera. So you are more capable of that for the room business. But also in the offer making more sure that you have leisure activities in the hotels that are strong. So it's a reason to stay in those hotels. That is absolutely something we are looking at. And also, as we all know, there are still question marks in how much of the meeting business will be in the future. I'm sure that a lot of the meeting business will actually return because we need to meet physically. But some of it might continue to be digitally. So some of the square meters we can use for some leisure activities to secure that we also have a strong offer in those segments. But then it's also important for me to say that it might be some 60% the corporate and 40% leisure before the pandemic. And even though we know that leisure will outgrow corporate also in the years to come, corporate is still an important part of the business. And corporate is many things like we also normally speak about. It's not only the white collars, it's not only businessmen and women in suits, it's also infrastructure buildings. It's also a sports group. It is kind of all the things that are contracted business. So -- and that part of the business is returning quite fast, what we also have seen in other like in China and U.S. So I'm sure that some traveling will change a bit, but we will be focused also on securing that we are open for business, both in the leisure and the corporate segment.

[Karl-Johan Bonnevier]

I would certainly not write off the corporate segment, that's for sure. Then one final on that one. When you look at the mix of your hotels, capital cities to regional cities and smaller more, say, mainly leisure-driven destinations, do you see that any of those relative attractions in your portfolio will, say, change dramatically?

[Jens Mathiesen, President & CEO]

I think what we have seen, actually, there has been a lot of focus on getting more hotels to the capital cities, and that's where we actually suffered during the pandemic, where some of the outskirt hotels have performed pretty stable and are performing very well exactly right now. But I think when you look at long term, unless we have new pandemics, et cetera, which we, of course, are also -- we need to take into account in our contracts and how we deal with that in sharing risk. But when you look at it long term, it is -- when you open up for the international traveling, it is the major cities and capital cities that are of interest for an international leisure guest. So they won't go to the small cities, they will start going to Stockholm or to Helsinki or to Copenhagen. So we will try to have a fair mix of the portfolio to secure both, let's say, customer segments. But also in the capital cities, we will focus on having a bit stronger leisure offering to secure that we take our share of that.

[Karl-Johan Bonnevier]

So when -- you look at more of an evolution than revolution looking at your portfolio.

[Jens Mathiesen, President & CEO]

That's the way it is because it won't change totally from one day to the other. But we see a slight shift between the corporate and the leisure. And in some, I don't know, 6, 8 years from now, I think this will probably be 50-50 when you look at that. And before the pandemic, it was 60-40. So yes, it is mixing up with leisure and corporate much more.

[Operator]

Thank you. We have no more questions from the line. I will hand it back to our speakers.

[Jens Mathiesen, President & CEO]

Thank you very much, and thank you all for joining this morning. I know there's a lot of companies out there right now. I wish you all a good summer and looking forward to speak to you again. You can call Henrik directly if you have further questions after this. Otherwise, we will speak to you in the next quarter. Good summer to all of you.