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Edited Transcript of HCITY*.MX earnings conference call or presentation 23-Apr-20 3:00pm GMT

Q1 2020 Hoteles City Express SAB de CV Earnings Call

CUAJIMALPA DE MOREL Apr 24, 2020 (Thomson StreetEvents) — Edited Transcript of Hoteles City Express SAB de CV earnings conference call or presentation Thursday, April 23, 2020 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Héctor Vázquez Montoya

Hoteles City Express, S.A.B. de C.V. – Deputy Director of IR

* James Paul Smith Marquez

Hoteles City Express, S.A.B. de C.V. – CFO & Administration

* Luis Eduardo Barrios Sánchez

Hoteles City Express, S.A.B. de C.V. – Chairman and CEO

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Conference Call Participants

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* Fernando Froylan Mendez Solther

JP Morgan Chase & Co, Research Division – Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to Hoteles City Express First Quarter 2020 Earnings Conference Call. Thank you for joining us today.

For opening remarks and introductions, I would like to turn the call over to Mr. Hector Vazquez, Investor Relations Director from Hoteles City Express. The floor is yours, sir.

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Héctor Vázquez Montoya, Hoteles City Express, S.A.B. de C.V. – Deputy Director of IR [2]

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Thank you, and good morning, everyone. Hoteles City Express first quarter 2020 results were released yesterday after the market close. They can be found on Hoteles City Express’ Investor Relations website. We would like to remind you that during this call, management comments may include forward-looking statements. We ask that you please refer to the legal disclaimer in the quarterly reports for guidance on this matter.

Joining us today’s call are Mr. Luis Barrios, our CEO; Mr. Paul Smith, our CFO; and Mr. Santiago Parra, our Corporate Finance Director. Luis will begin with some opening remarks; followed by Paul, who will present the company’s financial results. We will then open the floor for questions.

Now it’s my pleasure to turn the call over to Luis.

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Luis Eduardo Barrios Sánchez, Hoteles City Express, S.A.B. de C.V. – Chairman and CEO [3]

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Good morning, everyone. Good morning, everyone, and thank you for joining us today to discuss Hoteles City Express first quarter results for 2020. Given the special circumstances we find ourselves in, to start my comments this quarter, I would like to recap our strategy around the COVID-19 pandemic. First, first and foremost, I would like to reiterate that Hoteles City Express is actively participating in all fronts with local, state and federal authorities, as well as with the communities near our hotels to slow down the spread of the virus and protect all our stakeholders.

We have taken an active role with the governing authorities and industry chambers to proactively help to define the guidelines to operate on existing circumstances and to ensure that we protect our customers from employees — and employees of the sector. Our customers are the current — are at the center of our strategy, always. Because of this, we have implemented highly flexible policies for our individual and group reservations that allow guests to cancel or reschedule, free of charge, so that any — only essential trips are made.

To collaborate with the government’s stay-home campaign, we continue to promote social distancing measures to guarantee that every essential travel need is met with safe — with a safe and sanitized hotel room at any of our properties.

We have also focused on making sure we have what we need for the toughest part of this emergency from a balance sheet and liquidity perspective. The first steps taken, we’re drilling to reduce our operating cost in the hotels and the operating company. We received wonderful support from all the stakeholders, including discounts from suppliers, reduction in rents from our leases, deferral of salary increases and bonuses to employees and as well, reductions from our Board member fees.

We will be able to continue to operate despite extremely unusual conditions we’re living under. As we’ve discussed in the past, we believe with the actions we have taken, we have protected our balance sheet here. As disclosed in the beginning of March, we withdraw MXN 1 billion from our available revolving facilities. We delayed on our nonessential CapEx plan, slowed down or even completely stopped developments from — of some of our projects until we have better visibility.

As the year progresses, we will continue to focus on our asset — our asset-light strategy. We are also looking at possibilities for asset recycling strategies, including brand finished hotels, co-owned hotels or even hotels in South America should that make sense, all things considered.

At the end of the quarter, our net debt-to-EBITDA ratio reached 5.1x. This is above our stated financial policy. And as our EBITDA continues to be impacted by the pandemic, it will worsen. Having said that, with the agreements we have with our bank creditors, we think this ratio is not fully representative of our ongoing business. And as such, we are confident we can obtain the required waivers until the situation normalizes.

As the health emergency stabilizes and the capital allocation efforts we highlighted before come to fruition, we would expect to see the ratio coming back to more comfortable levels, slowly but surely.

Moving on to our operations, I want to paint a picture of what we’re doing with our properties, all of which is completely aligned to what health authorities have outlined. Out of the 153 hotels we have today, 30 are operating under the cluster scheme, given their physical proximity, thereby optimizing their operating costs and expenses by concentrating demand on 1 of those properties — 1 of the properties in the complexes in the cluster. We have obtained authorizations to operate 12 hotels within normal occupancy levels given their strategic relevance to essential health or economic activities.

The remaining properties are operating under a minimal operation scheme. This means a minimal on-site team, some floors are closed and some services are reduced. These hotels are providing a place to stay mainly to health workers and other key people in what they have been deemed essential industries or to foreign or domestic travelers who weren’t able to get back home. With the changes in the operating structure, these hotels have significantly lowered their breakeven points compared to our usual operations. In all our hotels, it’s important to say, we have increased our focus on sanitation practices, achieving high-grade and hospital-grade standards. We have introduced distancing to our new normal customer journey experience, and we have reinforced our health and safety protocols to guarantee a safe stay under the current complex circumstances.

We believe that in the new normal traveler journey, the guest will search for accommodations that provide health standards of the highest quality. The budget will be austere and mentality cost-conscious with initial travel by car individually or in small groups and will increasingly rely on the use of technology throughout the journey. We are planning to meet — we are prepared to meet our customers’ evolving needs and trust that once the economy starts reopening, the dynamism of the recovery will convert from business travel and later from the leisure traveler.

Our commercial team remains very close to the corporate accounts and to the individual business traveler to make sure we are well positioned for when the economic activity resumes. We are certainly located near many essential sectors of the economy, and we believe this will be seen over time as the economy reopens.

Finally, we know that our most valuable is our employees. Staff and Board members, from which we have only received an amazing support and are highly motivated to go over this crisis. Because of this, we are planning to preserve most jobs within the company, and this, in turn, will allow us to capture all available opportunities once the economy starts to reopen. To achieve it, we’ll remain in continuous communications with our suppliers and business partners in order to find alternatives to seek optimization of both costs and expenses.

Let me finish by saying we are actively making sure we’re ready on all fronts to weather this storm. We want to make sure all our stakeholders come out on the other side. So we can together rebuild our reality or even build a new one. We will continue to offer our support, whatever is needed, and we will keep you updated as soon as the situation progresses. As usual, thanks for your trust and your support.

Now I would like to take — to hand over to our CFO, Paul Smith, who will provide you with further details on our financial and operations — operational performance. Paul, please proceed with your remarks.

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James Paul Smith Marquez, Hoteles City Express, S.A.B. de C.V. – CFO & Administration [4]

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Thank you very much, Luis. My remarks here are based on Hoteles City Express first quarter financial results, which were prepared under IFRS. During the first quarter, we added 2 hotels to our portfolio, bringing the total to 4 more properties than last year’s comparable quarter. Of the 154 hotels in operation at the end of the quarter, 123 were established properties, 17 more than the first quarter of 2019. Our number of installed room nights during the quarter was 1.6 million, which represented a 3.9% increase compared to last year’s comparable period. This partly accounted for the decline in our consolidated occupancy level. But our ability to absorb new properties this quarter, in particular, was significantly affected by the change in pace in March from the pandemic.

At the chain level, our ADR rose 1.1% to MXN 1,025. While RevPAR decreased 12.7%, closing the quarter at MXN 473. Revenues totaled MXN 652 million, a 9.1% decrease year-on-year. Hotels operation income decreased 8.6% to MXN 618 million, while the administration income for the quarter decreased 7.5% to MXN 177 million. Total costs increased 1.4% year-on-year to MXN 614 million, mainly due to an increase in depreciation and amortization. Sales and administration expenses decreased 12.6% year-on-year to MXN 108 million.

That brings our first quarter adjusted EBITDA, which decreased 27% year-on-year to MXN 160 million. The corresponding margin contracted 600 basis points to 24.6%.

Comprehensive financing costs increased MXN 130 million. We continue to make disbursements from bank financing lines over the last 12 months for new hotel developments.

Our financial liabilities increased 22% year-on-year to MXN 6.5 billion. Cash and cash equivalents also increased MXN 1.8 billion, bringing net debt to MXN 4.7 billion, up 6.8% year-on-year. That puts our net debt-to-EBITDA at 5.1x.

As Luis mentioned, we expect this metric will deteriorate in coming quarters as our EBITDA decreases given the current operating conditions. The combination of a 67% decline in operating income and an increase in our net financing costs led to the net loss we booked this quarter, which amounted to MXN 96 million.

In summary, this quarter clearly marked the start of a complex period for our industry given the COVID-19 pandemic. We will remain disciplined with our operations and investments and continue to work on different fronts to maintain our balance sheet liquidity. Our creditors believe in our ability to weather this storm and so do we.

Thank you for your attention. Operator, please begin the Q&A portion of our call.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question we have will come from Froylan Mendez of JPMorgan.

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division – Analyst [2]

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And I hope all of your families are healthy and doing well. My first question is, what are the pending CapEx for the rest of the year? Secondly, what is the amount of cash interest expenses going forward, including the new line credit plus the capitalized interest expenses? And lastly, what should be — should we be thinking about taxes, cash taxes for the rest of the year?

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James Paul Smith Marquez, Hoteles City Express, S.A.B. de C.V. – CFO & Administration [3]

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This is Paul Smith, and I also hope that your family and everything within your close circle are safe and healthy. With regards to CapEx, what we have for the whole year, as a whole, it’s about MXN 400 million. Basically, we have some remodelings that were pre-funded before the pandemic hit. And given that we have a low occupancy right now, it makes sense to start remodeling so that you basically take advantage of this period and instead of doing the typical process, which typically takes between 9 and 12 months, and you can do it in basically 6 months. We will also be concluding with the final investments of the properties that are almost finished. So for the whole year, we’re estimating about MXN 400 million with regard to interest expenses, the impact of the new line is very marginal. We basically managed to deposit those resources into a vehicle that basically pay us a little above fee. So basically, we’re only paying the spread on the line, which is about 150 basis points. So that should really be the only increase in terms of the financing costs.

We are seeing with interest how the rates in Mexico are evolving. We continue that further decreases in the leading rate are merited given the economic conditions. And this should also impact on the downward, the interest cost for the year as a whole.

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Fernando Froylan Mendez Solther, JP Morgan Chase & Co, Research Division – Analyst [4]

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And on taxes, Paul, if you are so incented to let me know what should the outlook be, given the losses that we have been seeing so far?

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James Paul Smith Marquez, Hoteles City Express, S.A.B. de C.V. – CFO & Administration [5]

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Yes. We don’t have a tax basis. Yes, I think that’s a valid assumption for the year.

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Operator [6]

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(Operator Instructions) Okay. Well, showing no further questions, this concludes our question-and-answer session. I would now like to turn the conference call back over to Mr. Luis Barrios for any closing remarks. Sir? Mr. Barrios? (Operator Instructions)

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Luis Eduardo Barrios Sánchez, Hoteles City Express, S.A.B. de C.V. – Chairman and CEO [7]

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I’m sorry. Thank you, again. I would like to end this call by reiterating we are ready, willing and able to do whatever it takes to support all our stakeholders throughout this crisis to the best of our abilities. We look forward to talking to you in the next earnings call. And as usual, please feel free to reach out if you have any questions or comments in the meantime. We’ll be more than happy to hear from you. Thank you, and have a good day.

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Operator [8]

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And we thank you, sir, and to the rest of the management team for your time also today. Again, we thank you all for attending today’s presentation. At this time, you may disconnect your lines. Thank you, again, everyone. Take care, and have a great day.

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