Scandic Hotels Group AB

STO:SHOT

Earnings Call Analysis

Scandic Posts Record Quarter with Growth Strategies

Scandic Hotels Group AB reported a record-breaking third quarter in 2023, driven by solid market demand, all-time high net sales, and high occupancy rates of 71%. RevPAR achieved a new peak of SEK 933. Adjusted EBITDA hit a record of SEK 1.142 billion excluding one-offs, translating to an impressive 18.1% margin. One-offs added SEK 31 million, pushing the margin to 18.6%. Partnership with Oracle on OPERA Cloud expected to further enhance guest experience and operational efficiency. CEO Jens Mathiesen announced continued strategic growth, including new hotel signings and forecasts stable trends into Q4, although it's a smaller quarter. Scandic is preparing for 2024 with digital initiatives for operational efficiency and is adept at quick adaptation to economic changes. The Go and Signature hotel segments have potential for 70-80 new Nordic hotels over the next 10-15 years.

Record Performance with Robust Growth Strategy

Scandic Hotels Group announced a remarkable third quarter for 2023 with record-breaking results, showcasing their efficiency and strength in the industry. The CEO, Jens Mathiesen, and CFO, Asa Wiren, delivered a narrative of success with the company achieving all-time high net sales and an impressive occupancy rate of 71%, indicating better performance than the overall Nordic hotel market. The demand was driven by a solid blend of leisure and corporate travel. One of the key highlights was the Resilience of the wholesale market against inflation, reflecting a positive trend in hotel stays for both business and leisure purposes.

Ambitious Financials and Market Growth

Financially, Scandic Hotels reported a significant EBITDA margin improvement of 2.2 percentage points compared to Q3 in 2019, solidifying their financial standing with net debt at historical lows. The company emphasized its commitment to commercial excellence and efficiency, which has paid off in facing the inflationary environment. Notably, there was an emphasis on growth, with strategies aimed at expanding their portfolio through decisive collaborations with property owners and announcing new partnerships such as with Oracle, executing a complete cloud-based platform to enhance guest experiences and operational cost-efficiency.

Financial Synopsis: Record-Level Net Sales and EBITDA

In terms of financial specifics, net sales for the quarter were reported at SEK 6.3 billion, a 5.2% increase leading to a new record level with an adjusted EBITDA margin reaching 18.6%. This included one-offs of SEK 31 million, related to electricity contributions in Sweden and compensation for refugee housing in Norway. Excluding one-offs, the adjusted EBITDA was SEK 1.142 billion, an all-time high for the group. Asa Wiren highlighted the financial discipline that led to these outcomes, underscoring the group's ability to capitalize not only on increased occupancy but also on higher prices.

Strategic Expansions and Brand Development

The hotel group has made significant strides in strengthening its market position, particularly with expansions in Helsinki and Stockholm. Two new hotels were signed in significant agreements, including the first Scandic Go in Finland. Moreover, the introduction of the Scandic Go brand to the economy segment promises to invigorate the company's growth trajectory. The group also announced plans to open new Signature Collection hotels in upscale segments, capitalizing on increasing demand from leisure travelers. Scandic's growth is thus not limited to quantitative increases in rooms and properties but incorporates qualitative enrichment of their hospitality portfolio.

Cultivating Financial Robustness and Innovation

With a net pipeline of 1,499 new rooms and heightened investments in renovations, Scandic is resolute in maintaining its competitive edge. To further complement its growth and profitability, Scandic is working on a full-scale implementation of a cloud-based solution provided by Oracle, which will not only enhance guest experiences but also streamline operations. This initiative exemplifies the company's dedication to integrating technology to foster efficient and scalable growth. Their financial strategy remains cautious yet ambitious, with a target maintenance CapEx of between 3% to 4% of net sales aimed at sustaining long-term value creation.

Earnings Call Transcript 2023-Q3

[Operator]

Welcome to the Scandic Hotels Group Q3 2023 Report. [Operator instructions]Now, I will hand the conference over to the speakers, CEO, Jens Mathiesen and CFO, Asa Wiren. Please go ahead.

[Jens Mathiesen, executive]

Thank you very much, and good morning, everyone, and thank you for joining this presentation of Scandic's Third Quarter 2023.As was just said, I'm Jens Mathiesen. I'm the CEO of Scandic and together with me, I have Asa Wiren, who is our CFO. And we will talk you through the quarters as always.So let's jump straight into it and please turn to Page 2. You probably already saw the results, but I'm very proud to present a new record quarter that is another proof of how we have become a more efficient and profitable and even stronger Scandic. With the continued sharp focus on commercial excellence and efficiency we deliver an eventful quarter with all-time high net sales, stronger underlying results, new signings and high guest satisfaction.Market development was solid, with high demand from leisure in combination with a good start to the important season for corporate travel and meetings as well. We sold more rooms and more room nights than we did last year, and occupancy increased to 71% in this quarter. This was actually an improvement from last year and slightly better than the performance of the overall Nordic wholesale market. With high demand and continued positive price development in all our markets, RevPAR reached new all-time high levels.The wholesale market is resilient against the high inflationary environment, and hotel stays continue to be prioritized for both business and pleasure. Our net debt was at a historically low level at the end of the quarter and with strong financial position, we keep high pace to grow the portfolio and to build a stronger Scandic. We have intensified collaborations with property owners, and it's very satisfying to see how we are growing the portfolio.During the quarter, we announced a new Scandic Go signing with 221 rooms in Central Stockholm, which we presented in the Q2 report. We also opened our first Scandic Go in Stockholm this quarter with great success and interest from both guests and property owners. This creates, I think, good conditions for our growth ambition in this growing economy segment.In September, we also signed an agreement for 2 new hotels in Helsinki. And we also recently announced an extended strategic partnership with Oracle, and we are working at full speed to implement a complete cloud-based platform in all our hotels and central functions. This is a very important step in our strategy, which is totally in line with what we have communicated before to improve guest experiences and create an even more cost-efficient operation in total. I will come back to this later also in the presentation. But all in all, a very strong quarter.Moving on, please turn to Page 3, where you can see quarterly adjusted EBITDA development since the beginning of 2020. Excluding one-offs, adjusted EBITDA reached a new record level of SEK 1.142 billion, corresponding to a strong margin of 18.1%. Compared with the third quarter in 2019, it's a margin improvement of 2.2 percentage points. It's pleasing to see how we are improving the underlying results, while building a stronger Scandic. Including one-offs, we report an adjusted EBITDA of SEK 1.173 billion. The performance in the quarter was driven by continued solid market development, in combination with commercial excellence, high efficiency and an overall higher activity level within Scandic. Asa will, of course, talk you through the financial development later in this presentation.But please turn to Page 4. Here, you can see the monthly market occupancy in the Nordic countries. The market development was solid in the quarter, with demand in line with last year. Scandic's occupancy rate, as I mentioned earlier, increased to 71% in the quarter, which is an improvement compared to the same period last year and slightly better than the performance of the overall hotel market in the Nordics.The good demand was mainly driven by continued high levels of domestic and inter-Nordic travel as well as international tourism. The occupancy compared with 2019 is explained by lower volumes of intercontinental travels. However, this segment continues to recover. The market also had around 6% more rooms at the end of the quarter compared to the end of the third quarter '19.So please turn to Page 5. This is market data for average room rates for Sweden, Norway, Finland and Denmark, indexed to the corresponding month in 2019. Prices continue to develop positively and Scandic's average room rate in the quarter was 6% higher than in the same quarter last year, and 23% higher than in 2019. Also note that Finland is lagging other markets in September due to exceptionally strong prices in 2019. As we have mentioned before, Finland held the Presidency of the Council of the European Union in second half of 2019, which resulted in very high room rates at that time, especially in September, October and November. So price is always a key priority for us. And with, I think, very solid occupancy rates, which we are seeing right now, we ensure that we maintain our focus to drive prices also going forward.Please turn to Page 6. Here, you can see the market's RevPAR development, indexed to corresponding month in 2019. The development was strong in the quarter, with Norway continuing to lead the way with a RevPAR level that has been 33% to 36% higher than in 2019. Scandic reached a new record level with a RevPAR of SEK 933 in the quarter compared with SEK 875 last year and SEK 807 in 2019. We also, as mentioned, had 6% more rooms at the end of this quarter compared with the third quarter in 2019, which you need to add.Please turn to Page 7. Our increased focus on growing pipeline is showing results. During the quarter, we have strengthened our position in Helsinki and signed an exclusive agreement for 2 new hotels with a total of 459 rooms. It's a Scandic hotel and one Scandic Go. This is our first Scandic Go in Finland. And as I mentioned, we see great interest in our new brand in this fast-growing economy segment for both guests and property owners, which gives us quite good confidence in our growth ambitions within this segment.The new hotel will be located in the new unique event area called Garden Helsinki, a few minutes outside Helsinki City Centre. This is a growing and very key destination, and a milestone in Scandic's and Finland's growth journey. The hotels are expected to open in 2028, and will be certified according to the Nordic Swan Ecolabel before opening. During the quarter, we also announced a new Scandic Go signing with 221 rooms in Central Stockholm, which we also highlighted in the Q2 presentation.Please turn to Page 8. During the quarter, we announced 2 new Signature Collection hotels to strengthen our offer and to capture the growing demand from leisure in the upscale segment. The hotels have been part of the pipeline for some time, and we are expected to open in Tromso, 2025 and in Aarhus, 2026. I'm happy that we are strengthening the offer with another Signature hotel in Norway, and that we are now opening our first one in Denmark.Please turn to Page 9, where you can see the pipeline. With a strong financial position and strengthening organization within commercial and business development, we keep high pace to further grow and optimize the portfolio. At the end of the quarter, we had 1,499 new rooms in the net pipeline, which was 582 more than at the end of the previous quarter. I'm pleased that we are strengthening our position in key markets, as well as bringing our first Scandic Go to Finland. As I mentioned in the previous quarter, we are increasing investment for renovations as well of existing hotels to create a more competitive portfolio. And with our strong financial position, we are determined to get back to our target of maintenance CapEx of between 3% to 4% of net sales.With that, please turn to Page 10. Earlier this week, we announced the implementation of the complete cloud-based solution, Oracle Hospitality OPERA Cloud. By connecting all our hotels and central functions on one platform, we will be able to create even better guest experiences and increase efficiency through improved steering, booking and pricing. This will also allow our team members to spend more time creating value for our guests. One example of this is faster and smoother booking and check-in and check-out processes. We see excellent opportunities to exploit more economies of scale and increase growth and profitability over time with this cooperation. We expect all our hotels to be up and running on the platform in the second quarter next year.With that, please turn to Page 11, and I hand it over to you, Asa, to take us through some of the financials.

[Åsa Wirén, executive]

Thank you, Jens, and good morning, everyone.Let's turn to Page 12, and start off with the financial performance in the quarter. As mentioned, net sales increased by 5.2% to a new record level of SEK 6.3 billion. We also delivered a strong result with an adjusted EBITDA of close to SEK 1.2 billion. including one-offs of SEK 31 million, and this corresponds to a margin of 18.6%. In this quarter, one-offs included a one-time electricity contribution in Sweden and compensation related to housing for refugees in Norway.Last year, we had one-offs of SEK 76 million in the third quarter. If we exclude one-offs, adjusted EBITDA reached a new record all-time high level of SEK 1.142 billion with a margin of 18.1%. This was an improvement, as Jens mentioned, by 2.2 percentage points compared with the third quarter in 2019. Thanks to our strong financial position, we have increased the activity level with focus on the overall IT landscape and the implementation of OPERA Cloud, as well as the commercial development and the launch of Scandic Go. This was partly reflected in increased costs for the central functions in the quarterAll in all, this was a strong quarter driven by our commercial ability to capture good demand in our markets with continued high efficiency and cost control. I'm pleased with how we grow the business and how we have become more efficient and profitable over time and for sure, this will continue. We expect approximately SEK 20 million in one-offs in the fourth quarter related mainly to Norwegian housing for refugees.And then please turn to Page 13. We had a strong free cash flow in the quarter of SEK 899 million and SEK 1.2 billion year-to-date. Working capital was impacted by repayment of variable rent debts for 2022 of a little bit more than SEK 700 million and seasonality effects, with a larger share of business customers and meeting in September. Altogether, we report a strong cash flow. As we mentioned in the previous quarter, we have had a cautious approach with low CapEx, but we are gradually ramping up and plan for higher expansion, renovation and IT CapEx from this quarter going forward.And let's please turn to Page 14. We continue to reduce our debt level, which was at a historically low level at the end of the quarter. Net debt decreased to SEK 1.9 billion in the quarter and corresponds to a net debt in relation to adjusted EBITDA of 0.8x on a rolling 12 months. Excluding the convertible bond, net debt only amounted to SEK 336 million and the net debt in relation to adjusted EBITDA of 0.1x.Net debt included SEK 1.6 billion related to the convertible bond and SEK 797 million related to deferred VAT and social security payments in Sweden. Due to the strong performance in the 9 months of this year, a new rent debt of approximately SEK 400 million has been accrued for 2023. The majority of this will be settled, as you all know, during the first half of 2024. Our available credit facility amounted to SEK 3.4 billion, and total available liquidity amounted to SEK 3.6 billion at the end of the quarter. Lastly, the convertible bond has its conversion price at SEK 43.36, and matures in a year from now in October 2024, with potential dilution of 41.5 million shares. But as you all can see in the numbers, we have available funds to handle this.And then please turn to Page 15. And here, you can see the net financial items and impact from IFRS 16. Including IFRS 16, the reported financial net was minus SEK 510 million. Excluded for IFRS 16, the financial net was minus SEK 67 million. Non-cash convertible interest was SEK 43 million, and interest payments and bank loans decreased as a result of our lower debt level. Ultimately, cash financial items amounted to SEK 22 million.So with that said, please turn to Page 17 and back to you, Jens, for some final comments and what you see for the future.

[Jens Mathiesen, executive]

Thank you very much, Asa.And finally, some comments and reflections on the outlook from my side. I'm very proud to conclude that Scandic is standing stronger than ever before. With focus and persistence, we have taken important steps forward to become a more efficient and profitable company with a very strong financial position, all while increasing guest satisfaction. The good momentum from summer months has continued into the fourth quarter, and we are on track for another strong full-year performance. So it's continuing.Based on the current booking situation, we expect a solid fourth quarter with occupancy on par with the same period last year, but at higher prices. We are highly prepared for the future, and we are growing the business in a controlled manner with balanced investments and very high efficiency. I want to thank all our employees for their fantastic commitment, and our owners and guests for their trust in Scandic.With that said, I think, let's hand it back to operator for the Q&A.

[Operator]

[Operator Instructions] The next question comes from Karl-Johan Bonnevier from DNB Markets.

[Karl-Johan Bonnevier, analyst]

Yes. Congratulations to an excellent set of numbers and very good development in the market. Just to pick your brains a little first on the strong performance in the quarter. And also, you've alluded to comparing it to the same quarter in 2019. Is it possible to, say, maybe give us some sort of bridge in the way how you see the underlying performance in that kind of context? What kind of structural gains have you managed to create in the platform compared to pre-COVID?

[Jens Mathiesen, executive]

Yes, Karl-Johan. And thank you for the question. No, we have -- I think there's a lot of things we could say about it because we have been extremely focused at Scandic to become a stronger company after the pandemic. And we have been holding back when it comes to adding a lot of resources, especially above hotel level, meaning that we want to maintain a very high efficiency level also after to support, you could say, the improvement of margins going forward. So, there has been a lot of prioritizations when it comes to resources.When that is set, I think we have also done a lot on hotel level. We are extremely strong in the commercial field. Right now, we have added quite some resources to secure that we are on top of, let's say, the market when it comes to gaining and taking advantage of the opportunities both from the online sales, OTA partnerships and also from the good cooperation we have with both corporate and leisure guests in local markets. So, there's a lot of initiatives that we have been doing. But we have -- mainly have a large focus on becoming a stronger company on the cost side and be agile and speedy when it comes to the commercial activities.And then what also we said in this call and as you hear, we have actually -- it's now we start talking about our partnership with Oracle, which is to move to a cloud-based solution. We have actually been working on that for approximately a year. So, we have been working on preparing ourselves for this and negotiating the right agreement with Oracle. And now we have already started this transformation, meaning that within the next, we will be done by first half next year in moving all our hotels on to a cloud-based platform that also adds a lot of opportunities going forward. So, Scandic is doing quite a lot of good stuff right now. And it sees in the numbers that we are quite successful in getting result out of it.

[Karl-Johan Bonnevier, analyst]

Definitely. And coming back to the Oracle implementation, is there a system kind of gain coming out of it on the cost side? Or you alluded to a lot of opportunities to drive efficiency and, let's say, on the hotel level? Where is the gains, if you put it like that?

[Jens Mathiesen, executive]

Over time, it will be both because the system itself is actually cheaper than the old platform. So cost-wise, there's a gain immediately on that. But you can say when you look forward, this allows us to add and both, attach and detach different kind of systems to the cloud-based solution, meaning that we can add a lot of features when it goes forward, especially for the guest journey, speeding up the check-in, check-out phases. This makes it possible to even include mobile keys for the rooms and electronically solutions for checking in, checking out on your mobile as a guest over time. That will save cost in the receptions, of course, because over time, more and more people will do that themselves. And it also has a lot of commercial advantages because we can give customers possibilities for ancillary sales opportunities, book a restaurant, do you want to upgrade for the next room, category, et cetera, which we can do much easier electronically. So, there will be a lot of commercial upside, but also it's a more cost-efficient system.

[Karl-Johan Bonnevier, analyst]

Excellent. And I guess it creates scalability for you when you now start to look at expanding the portfolio again to a much more focused.

[Jens Mathiesen, executive]

Yes. And we have had in there. We call it internally One Scandic, but I can even spread that to you on this call because what we call One Scandic is that we want to benefit from being as efficient as we are and taking the best of everything, and take the best version of all things we do and do that all over. So, we are extremely focused across the management team to secure that we continue to find opportunities to become even stronger, even though we have come far.

[Åsa Wirén, executive]

And one can also add to that, that I don't think that this is a kind of 1 or 2 booms to improve margin. We are in a volume business. So it's rather that finding the nitty-gritty things, doing good work together with our colleagues every day. I think that is important to bear in mind. So that's the way we actually work with the margin every day.

[Karl-Johan Bonnevier, analyst]

Turning to your Q4 outlook. It sounds like it's very much a continuation of what you have seen in Q2 and Q3. Could you allude little to maybe what you see on the meeting bookings and pre-bookings and similar kind of things? Are we back to similar patterns as pre-COVID? Is that kind of visibility you've got now?

[Jens Mathiesen, executive]

It's always difficult because you still see some differences, like I mentioned, we're still lacking some of these big congresses, for instance. And we also compare with '19, if you look pre-pandemic, we compared with '19, which was extremely strong in Finland due to this EU Presidency. But overall, we see -- in general booking pattern, we see a very stable trend, which you have seen also in the third quarter and this continues. So, we expect us to be in line or maybe slightly above, but I would say very close to be in line on occupancy, but definitely on higher prices. And we maintain a huge focus on being more efficient in the operation. Then you need to bear in mind all of you that we created nearly SEK 1.4 billion -- sorry, SEK 1.2 billion in this quarter. And it's a very large and strong quarter. Q4 is quite a small quarter. So remember that if you take the result in Q4, it is -- as one quarter maybe a bit less than just the month of September, result wise. So, we should definitely get the best out of it and we have a lot of focus, but it is not the quarter that will make it or break it to Scandic. This is a fairly small quarter.

[Karl-Johan Bonnevier, analyst]

No, very good execution in the high season, no doubt. Do you dare to raise the outlook to 2024? What are you planning for? What are you hoping for? And how are you preparing for it?

[Jens Mathiesen, executive]

No. But we are preparing a lot. And these initiatives on the digital side enables us to benefit even further for efficiency gains in the operation, which, of course, also is preparing for anything that might happen in the economy. I think you should bear in mind that when you look into the economy and all the concerns that we see on the share market and stock market right now, then look at the different sectors. And right now, globally, the hospitality sector is doing extremely well, maybe not on the stock price but definitely on the result side.So, we keep up very high momentum. We keep up a high momentum in the industry, and there's still a willingness to prioritize traveling and events as a person rather than spending on some other private stuff. So it's holding up both for businesses and for leisure. And when we look into next year, that is what we expect. But of course, we prepare for any adjustment that might come. And Scandic has proven during the last year that we are extremely fast in adapting. So if we see a decline in 1 or 2 percentage points on the top line versus expectations, we immediately can adjust on the manning side and on the cost side. So, we are well prepared.

[Karl-Johan Bonnevier, analyst]

Sounds promising. One last for me. Just looking at the new segment Go, and then also that you are starting to expand the Signature segment again, with listing a couple of the assets you have in your room portfolio into that segment. What kind of potential do you see for the 2 segments, so to say? If you're looking at a, say, maybe Nordic context, how many Go hotels would you be able to fit in without, say, diluting your current Scandic franchise and similar kind of things for the Signature operations?

[Jens Mathiesen, executive]

Without setting a timeline on it, we see a potential of maybe 70 hotels to 80 hotels over time. How long that will take us? But maybe in the Nordics, some 70 hotels to 80 hotels. We see that there's room for that in the market in the next coming, let's say, 10 years to 15 years. But of course, if the market develops, it could be that this change and that the opportunities grow even further. But right now, we see that without diluting on the current business. So, we see great growth potential within the region.

[Operator]

[Operator Instructions] There are no more questions at this time. So, I hand the conference back to the speakers for any written questions and closing comments.

[Jens Mathiesen, executive]

Thank you very much, operator, and thank you all for dialing in. I understand that you are overwhelmed by the strong results we are delivering and the positive outlook. So if you have further questions, please, you know where to find us, just give us a call. And I wish you all a great day on behalf of both me and Asa. Thank you very much.

[Åsa Wirén, executive]

Thank you.