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Edited Transcript of M04.SI earnings conference call or presentation 1-Aug-19 10:59am GMT

Half Year 2019 Mandarin Oriental International Ltd Earnings Presentation

Causeway Bay Aug 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Mandarin Oriental International Ltd earnings conference call or presentation Thursday, August 1, 2019 at 10:59:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Craig Alan Beattie

Mandarin Oriental International Limited - CFO & Director

* Peter James Holland Riley

Mandarin Oriental International Limited - Group Chief Executive & Director

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Presentation

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Peter James Holland Riley, Mandarin Oriental International Limited - Group Chief Executive & Director [1]

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Welcome to this presentation of Mandarin Oriental's results for the first half of 2019. I am James Riley, the Group Chief Executive, and I am joined by Craig Beattie, our Chief Financial Officer.

It's been a really exciting first half. We opened four new hotels in Beijing, Doha, Dubai and Lake Como and welcome back into operation our London hotel, which fully reopened in April following a comprehensive renovation. On new prospects, we have already announced one new hotel management contract and two new residences this year, and I expect several more to follow in the second half.

The group's profits in the first half were lower primarily due to the loss of earnings from The Excelsior Hotel, which closed for redevelopment at the end of March, and the commencement of a major renovation at our Bangkok hotel also in March. The remainder of the portfolio's financial performance was broadly flat, with some hotels performing better and some less well.

Let me now review the financial highlights for the first 6 months, noting that any dollar figures will be U.S. dollars. The combined total revenue of all hotels under management for the period was $641 million in the first half. Underlying earnings before interest, tax, depreciation and amortization or EBITDA was $69 million, down from $84 million last year.

The group's underlying profit attributable to shareholders was $11 million compared to $22 million in the first 6 months of 2018. In addition, a net nontrading loss of some $23 million was recorded primarily due to the write-down of remaining unamortized assets in The Excelsior. Underlying earnings per share were $0.0085 compared with $0.0176 in the first 6 months of 2018. An interim dividend of $0.015 per share has been declared, unchanged from last year.

Let me now turn to the RevPAR performance of the group's portfolio. The group's global portfolio currently comprises 32 owned and managed hotels, and overall RevPAR was 1% lower in U.S. dollar terms on a like-for-like basis. In Asia, while occupancy was mostly flat, average rates were broadly lower, leaving RevPAR 3% lower for the region. There was a similar story in the EMEA region, also 3% lower, again, due to average rates as occupancies held up and indeed improved in some hotels.

On the other hand, in America, our hotels produced a 5% increase in RevPAR, both occupancies and average rates contributed to this with notable improvements in Boston and Miami. Our profitability is principally derived from our owned or partially owned hotels.

So let me now comment on a few of the key properties that drove results for the first half. In Asia, strong demand in Tokyo and lower costs led to a good result, although this was offset by lower profits in our Hong Kong hotel, which experienced softer demand from corporate travelers. This is a trend that the industry was experiencing in Hong Kong, in part due to the slowing growth in Mainland China. The ongoing demonstrations in Hong Kong are also creating uncertainties in the city and are having an impact on performance.

Earnings in Asia were significantly impacted by the closure of The Excelsior. After 46 years in operation, Mandarin Oriental is redeveloping The Excelsior site as a commercial office and retail tower, which will take 6 years to complete. The Excelsior contributed some $10 million to underlying profit in the first half of last year compared to $6 million in the first half of 2019.

The closure of the River Wing in Bangkok for renovation also had an impact as the number of available rooms at the hotel was reduced to just 30 from 368 and some food and beverage outlets were also closed. Results in Singapore and Kuala Lumpur were broadly in line with the previous year. While in Jakarta, against the backdrop of highly competitive average rate discounts, the hotel did not perform well.

Now for Europe, where better results in London took earnings higher in the region. The reopening of Mandarin Oriental Hyde Park, London was a highlight of the first half with guests delighted by the new product. Early signs of performance have been encouraging with a good level of demand across all guest segments, and I am confident that our London property will quickly establish itself as the best hotel in London.

The hotel's results in 2019 comprised 2 components: insurance coverage for the loss of earnings while the rooms were closed for restoration until the 15th of April and actual trading performance from that point onwards. The comparative EBITDA in the first half of 2018 was lower as the hotel was partially closed for renovation.

The group's insurance coverage also provided for the repair of tangible asset damages in the fire. Now that the hotel has reopened, discussions with insurers on the final quantum of the insurance claim have commenced, and we hope to finalize the total claim by the end of the year.

In the rest of the EMEA region, results were broadly flat, except for our hotel in Paris, which had a challenging first half as demand in the city was dampened by the demonstrations during much of the period. The group's 50% owned hotel Ritz, Madrid remains closed for a restoration and is expected to reopen in mid-2020.

Finally, in America, we had some improved performances, most notably in Boston, where the hotel benefited from demand in the group and leisure market segments. Average rates increased 8%, while occupancy increased 3% and the hotel regained its position as market leader in the city. There were also better results in Miami and New York, the former delivering strong RevPAR growth of 7%, while both hotels improved their competitive position. Results in the region were partially offset by a weak performance in Washington, D.C. due to lower demand in the corporate segment.

I would now like to touch on our growth and development strategy. As shown in this slide, in addition to 32 operating hotels, the group has 15 hotels and 13 residences in the development pipeline, all of which are expected to open in the next 5 years. These are all management contracts, and I would expect this to be the case for most, although perhaps not all, future developments that are announced.

The group does have the financial strength to deploy capital to acquire hotels on a selective basis. However, if we are to sustain the growth and vibrancy of the brand, winning new management contracts will be crucial. Ideally, we will look to open 3 to 4 new properties a year in the coming years.

In this regard, it's extremely pleasing to have already opened 4 properties in the first half of this year: our first hotel in the Middle East, the first of 2 announced projects in Beijing and a second hotel in Italy for the group. Our plan is to open both hotels and resorts and to brand and manage linked residential developments. The properties we already have under development have a broad global spread, and I would expect the same to be true of future properties that we announce.

In the first half of 2019, we announced 2 new projects: 69 luxury residences located in a stand-alone building on Fifth Avenue in New York scheduled for completion in 2020, and a second hotel in Istanbul. This has a significant residential component and is located in the Etiler residential area. It comprises 158 guest rooms and 251 residences and is scheduled to open in 2022.

I will now pass over to Craig for a more detailed review of the group's financial performance.

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Craig Alan Beattie, Mandarin Oriental International Limited - CFO & Director [2]

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Thank you, James. To recap, as expected, the group's financial results in the first half of 2019 were substantially lower than the same period in 2018. Underlying EBITDA, including the group's share of underlying EBITDA from associates and joint ventures decreased by 18% to $69 million. This decrease was primarily due to 3 factors, namely, the absence of earnings from The Excelsior from April onwards, the impact of the renovation in Bangkok and a one-off termination fee in respect of a hotel contract in Las Vegas that was received in the first half of 2018.

Several nontrading items were recognized in the first half of the year. These included $31 million of costs in connection with the closure of The Excelsior, $25 million of which were accelerated depreciation charges, which are noncash in nature. Following the change in the use of The Excelsior from a hotel to an investment property under development, any movement in the market value of that development will be recorded as a nontrading item through the profit and loss account. In the first half of 2019, The Excelsior site increased in value by $9 million. Repair expenses in relation to the London Hotel, were also incurred, but these were completely offset by insurance compensation.

Turning to a review of the group's cash flow. Cash flow from operating activities is generated primarily by EBITDA from the group's subsidiary hotels. The group's EBITDA from subsidiaries, which includes nontrading items, was $62 million compared to $71 million in the first half of 2018. The movement in working capital in 2019 and 2018 mainly relates to differences in timing of insurance proceeds as a result of the fire in London.

On a cash basis, net interest paid was $8 million compared with $6 million in 2018 due to an increase in base interest rates. The group's weighted average interest rate on borrowings was 2.6% compared to 2.4% in 2018. The underlying EBITDA coverage of net interest expense, including the group's share of EBITDA from associates, was 7.1x compared with 9.6x in 2018. The lower interest cover in 2019 was primarily due to the reduction in underlying EBITDA resulting from the closure of The Excelsior.

Including movements in tax, working capital and other items, the group had an inflow from operating activities of $23 million in 2019 compared to $62 million in 2018. Other items were primarily noncash in nature, which, in 2019, included changes to the fair value of The Excelsior, and in 2018, included the write-off of tangible assets related to the fire in London.

The group's total investing activities over the period was $52 million. This primarily comprised $31 million of capital expenditure at existing hotels and $15 million related to the funding for the renovation in Madrid. Under financing activities, the group drew down a net $14 million on its existing bank facilities primarily to finance its 50% share of renovation costs in Madrid.

A final dividend in respect to 2018 results of $0.015 per share was paid in the first half, unchanged from the previous year. In terms of overall cash flow in the first half, the group had a net decrease in cash of $37 million and a closing cash balance of $211 million.

The group's balance sheet remains strong. At 30th of June, net debt was $336 million compared with $285 million at 31st December 2018. The gearing percentage, which takes into account the market value of the group's ownership interest in its properties, was 6% of adjusted shareholders' funds.

The average term of the group's borrowings increased to 4.7 years. In the first half, the group successfully completed the refinancing of its 2 major bank facilities in Hong Kong and London. The facilities in Hong Kong were increased by some $200 million to provide committed headroom to finance the first 3 years of redevelopment costs for The Excelsior site as well as general corporate purposes. At 30th June 2019, the group had $268 million of undrawn committed bank facilities.

Looking forward, the group has significant capital expenditure commitments in relation to previously announced projects totaling $766 million. This includes $585 million for the redevelopment of The Excelsior site, majority of which will be incurred from 2022 onwards. $42 million represents the group's 50% share of the Ritz, Madrid renovation costs, and $139 million has been committed to enlarge the hotel in Munich.

These capital commitments will be incurred gradually over a number of years and will be financed using an appropriate mix of external debt and group cash reserves. While gearing is expected to increase in the years ahead, current gearing levels are low and the group has capacity to increase net debt without compromising its ability to maintain robust debt service coverage ratios. Overall, the group remains in a very strong financial position.

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Peter James Holland Riley, Mandarin Oriental International Limited - Group Chief Executive & Director [3]

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Let me now conclude by commenting on our priorities for the second half of the year. We achieved a milestone this year by opening 4 new properties, and I am also expecting our residence project in Bangkok to open shortly, bringing 5 new additions to the Mandarin Oriental portfolio by the end of the year. I do not expect further new openings this year, but I'm looking forward to the prospect of additional new openings in 2020.

The Bangkok hotel will finish its major renovation in a few months, and we will continue to make progress on the restoration of the Ritz property in Madrid. The redevelopment of The Excelsior site is on track, and demolition is scheduled to commence in the third quarter. I'm expecting a number of new hotel and residence projects to be announced in the second half.

While the group's overall financial performance in the first half, excluding The Excelsior and Bangkok, was broadly flat, several markets are facing political and economic uncertainties, creating a challenging dynamic for these properties. 2019 earnings will benefit from the reopening of the London hotel, although results will remain subdued until the Bangkok and Madrid hotels also reopen.

Compared to 2018, 2019 will be impacted by the closure of The Excelsior. With 5 new properties opened in 2019 and further new projects and new openings to look forward to, I remain confident that we are building a strong platform for long-term growth. Our mission remains to deliver the best possible service and luxury experience to our guests so as to be the best luxury hotel group in the world.

Thank you for listening. If you have any questions, please send them to investors@mohg.com, and Craig and I will ensure that you receive a timely response. Thank you.