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Edited Transcript of NHH.MC earnings conference call or presentation 13-Nov-18 11:30am GMT

Q3 2018 NH Hotel Group SA Earnings Call

Madrid Nov 20, 2018 (Thomson StreetEvents) -- Edited Transcript of NH Hotel Group SA earnings conference call or presentation Tuesday, November 13, 2018 at 11:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Javier Vega-Penichet

NH Hotel Group, S.A. - SVP of IR and Investments

* Ramón Aragonés

NH Hotel Group, S.A. - CEO

* Beatriz Puente

NH Hotel Group, S.A. - CFO

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Conference Call Participants

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* Guilherme Sampaio

CaixaBank BPI - Analyst

* Daniela Longou

- Analyst

* Joao Safara

Banco Santander - Analyst

* Javier Pinedo

Exane BNP Paribas - Analyst

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Presentation

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Operator [1]

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Welcome to NH Hotel's third-quarter presentation results conference call.

I now hand over to the speaker.

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Javier Vega-Penichet, NH Hotel Group, S.A. - SVP of IR and Investments [2]

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Hello. Good morning to all. Welcome to NH Hotel Group nine-month and Q3 2018 results conference call. This is Javier Vega-Penichet from Investor Relations. Today you have in the call our CEO, Ramón Aragonés; and our CFO, Beatriz Puente. Both will drive you through the main guidelines of the service results published yesterday, and the current trading of the last months of the year. Then a Q&A session will be open to all of you.

So please, Ramón, you can start.

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Ramón Aragonés, NH Hotel Group, S.A. - CEO [3]

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Thank you, Javier. Good morning, everyone, and thank you for joining us today. This is Ramón Aragonés speaking. Before getting into the details of the results, let me start with the outcome of the tender offer which result were published on October 26.

As a reminder, the tender was addressed to the entire share capital of NH, excluding the 46.4% owned by Minor International. After the tender, Minor has reached 94.1% of the share capital of NH, which means that out of share addressed, [88.85%] tendered the offer. Settlement date of the tender was October 31.

Once the tender process is concluded, management team of NH has started to work with Minor International to define the strategy plan of NH to unlock value-accretive and synergistic benefits across both complementary businesses, with the aim of maximizing shareholder value.

With regards Minor's capital structure, the immediate plan, as they have communicated this morning in their results publication, is to ensure that Minor complies with its 1.75 times debt to equity ratio; and then focus on bringing that ratio down to a more comfortable level of 1.3 times by the end of 2019.

For that to process, Minor's strategy relies on a potential fair value adjustment of their investment in NH. Together with the issuance of perpetual bonds, with an equity accounting treatment with a -- sorry, with an equity accounting treatment. Moreover, financial co-investor, together with assets rotation strategies at Minor perimeter, will be implemented during 2019 to achieve the goal of ending 2019 with that comfortable level of leverage.

But to the business and moving to the results, I'm delighted to present another solid set of results, in line with the performance of the first semester. Recorded EBITDA increased in the first nine months plus EUR70 million, reaching EUR187 million. And constant focus on efficiency leads to a plus 0.9 percentage points margin improvement, up to 15.7%. These good results, with a strong trading achievement in the first part of Q4, allow us to confirm the EUR260 million EBITDA guidance for the year.

With regards the start of the last quarter of the year, I will highlight that the performance in October has been extremely positive, with a like-for-like revenue growth in October of 4% compared to 3.6% as of September, with Spain contributing with the highest growth among the European countries, partially explained by the first signs of recovery in Barcelona in the month of October, and also benefiting from easy comps.

To be more precise, October has been the best month of -- at EBITDA level of the Company, ever. And we are, right now, forecasting budget for November and December. So with 100% certitude, we are going to achieve the 2018 EBITDA budget.

As you can see in the highlights on page 3 of the presentation, the Group's positive operating trend continues with revenue up of plus 3.6% in the first nine months. Remark that this revenue growth, as I will explain later, takes into account the revenue loss from 2018 reforms totaling minus EUR12 million; and the negative currency evolution of the period in LatAm [sustrating] EUR22 million. Excluding currency impact, revenue would have grown plus 5.5%.

I will highlight the strong like-for-like revenue growth in Europe during the nine months, totaling plus 3.6%. Benelux continued reporting the highest like-for-like growth, reaching plus 7%; Italy, plus 4%; and central Europe, plus 3.1%. The Spain evolution is explained by the extraordinary low-teens like-for-like growth in nine months 2017, and Barcelona with situation till September. Taking into account these two factors, we can state that the plus (inaudible). So that's 0.7% like-for-like growth in Spain as a solid result, too.

With regards Q3 evolution, total revenue grew plus 2.9%, also affected the reforms of the quarter, with a business loss of EUR95 million and a negative currency effect of minus EUR8 million. Excluding currency impact, revenue would have grown 5% in the third quarter.

Benelux continued in the quarter very strong, with a like-for-like growth of plus 6.4%, boosted by the recovery of Brussels and a strong performance in Amsterdam and secondary cities. Central Europe reported also a solid like-for-like revenue growth of 4.8% due to a slight favorable trade fair calendar and warm summer. Milan and Madrid [comparation] of the quarter affected by some trade fair calendar events in the month of September last year.

Moving to page 5 of the presentation, and in order to explain the different evolution by perimeter, you can see that in the increase in EUR41 million in revenues in the first nine months, excluding the hyperinflation effect of Argentina, has been achieved despite the revenue loss from 2018 reforms, totaling minus EUR12 million and a negative currency evolution of the period in LatAm [sustrating] EUR22 million. Excluding currency impact, as I mentioned before, revenue grew plus 5.5%.

I will highlight in this chart that the revenue growth in the period has been driven by the healthy performance in the comparable or like-for-like perimeter, which grew 5% in constant currency, being the reported figure plus 2.5%, taking into account the negative currency evolution in LatAm.

Hotels renovated in 2017 grew revenues plus 19%, contributing with almost EUR10 million compared to last year; and the opportunity cost of 2018 reforms total minus EUR12 million; mainly from New York hotel and some hotels in Central Europe and Italy, especially in Rome. Including hyperinflation accounting effect related to Argentina, revenue growth is plus 3%.

With regards RevPAR metrics in page 6, the growth in the first nine months has been plus 2%; 73% through ADR, which grew plus 1.5% and reaching EUR97. Remarkable ADR growth in Benelux of 4.2%, and Italy of plus 3.5%. Occupancy level is up to 72%, implying in increase of 0.4 percentage points.

In order to better understand the RevPAR trend, it is worth highlighting the plus 2.7% growth in the like-for-like of comparable perimeter in nine months. Insights by region are: Spain, flat evolution. Secondary cities grew plus 4%. Madrid flat, explained by the strong congress calendar of 2017. And Barcelona, minus 6%, explained by the lower domestic leisure demand. Italy, plus 5%, excellent evolution of Rome, plus 10%. Milano, plus 4%; and secondary cities, plus 5%. Benelux, plus 8%, with a constant recovery in Brussels with 14% growth. Amsterdam, plus 7%; and also very solid performance in Dutch secondary cities, plus 8%. Central Europe, plus 3%, with a slightly positive trade fair calendar in cities like Munich and Frankfurt.

The RevPAR numbers confirms the Group revenue management ability to constantly increase market share ahead of competition, supported by the higher quality of our hotels.

In page 7, average RevPAR growth versus competitor has outperformed, with a relative increase of plus 1.7 percentage points, explained by the higher relative price increase of plus 1.1 percentage points, and the slightly higher relative occupancy of plus 0.5 percentage points.

Let me now turn the call over to Beatriz, who will give you more details by region; and the rest of the P&L, the leverage path, and targets for the year.

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Beatriz Puente, NH Hotel Group, S.A. - CFO [4]

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Thank you, Ramón. This is Beatriz Puente speaking. And good morning, everyone, and thank you for attending this call. Moving to the revenue performance by region from page 8 of the presentation, I will emphasize the performance on a like-for-like basis. Spain with a solid 0.7% on a like-for-like basis; and 2%, excluding Barcelona.

It's important to highlight the performance of Spain. Taking to account, I will say, the very good performance of Spain last year in the same period, with a growth of 11%.

Italy for the period, very sound growth of 4.4% in a like-for-like basis, with a very strong performance of Rome growing 9.5%, and Milano with a growth of 4.5%. Also the comparison is tough, taking into account that last year during the third quarter, there was significant activity of fairs in Italy.

The performance of Benelux stand out, with a like-for-like revenue growth of 7%, explained by the very good performance of Brussels, with a growth of 13.1%; and Amsterdam growth of 6.9%, but also with a very solid contribution of secondary cities with a growth of 4.9%. For Central Europe, the like-for-like revenue growth was 3.1% due to a positive favorable trade calendar in Germany.

Moving to Latin America, all the region has been impacted by the currency devaluation. In the case of Mexico, the increase of revenues at constant exchange rate was 5%. And including the negative performance of the currency and the performance decreased to 3%, minus 3%. In the case of Argentina, as Ramón has said, we have applied IAS 29, and I will cover later on the impact. But the performance was heavily impacted by the currency devaluation.

Saying that, the team has done a great job on having fixed rates on the [last] that has protected a lot the performance of Argentina, and also the cash of Argentina that originated there. The performance, therefore, with the impact of FX, has been minus 7%.

In the case of Hoteles Royal, the decrease was minus 2% in local currency. And that's mainly due to the oversupply that we have mentioned also in other conference call results in Bogotá, and the lower corporate revenues.

If we move to the cost performance of the Group on slide number 9, continues the focus on the cost control that has allowed the Group to reach an excellent conversion rate, at gross operating level of roughly 71%. In order to achieve those results, both -- all the cost has been under control. Payroll cost and operating expenses growth was 1.6%, fully explained by the perimeter changes due to the new openings and closings. So the [for us] as Ramón also has covered, continues to be efficiency and cost control a priority for NH.

Regarding lease payments and property taxes, increased by EUR12.4 million. That's roughly 5.3%. And the changes on the perimeter explained roughly 37% of this increase. And the rest, another 14%, is explained by [debit] positioning that we have done.

With the regarding of -- with all this, recurring EBITDA for the nine-month period reached EUR187 million in the first nine months of the year, implying an increase of EUR17 million of roughly 10%; while we continues to improve the margin of roughly 0.7 percentage points, reaching, in the period, 15.7% margin on a very sound conversion aligned with our target of 41% conversion rate, strong incremental revenues to EBITDA.

As per our report, the Group has implemented IAS 29 to reflect Argentina hyperinflation accounting. And if we include that impact at EBITDA level, the number will be EUR185.3 million.

Moving to page 10 of the presentation and below EBITDA, I will highlight the decrease on the financial costs of the Company by EUR16.6 million in the period due to the strong deleverage achieved by the Company. That have compared with the debt reduction process that the Group initiated in 2015, with the full debt 2019 bond repayment of last year. And as you are aware of the redemption of the convertible bond in June this year.

Also I will highlight that in the constant dollarization strategy of all the cash position that we have in Argentina also has contributed with positive financial income on top of -- of course you know the more important priority -- protect the cash Group position in Argentina.

The higher corporate income tax of roughly EUR7.8 million is mainly explained by the improvement of the performance at the business level, which is partially offset by, I would say, lower adjustment or lower non-deductible financial expenses.

Regarding net recurring income, for the nine-month period, the Group reached EUR50.7 million with a significant increase of EUR23.7 million. And I will say one of the first results what you see higher growth at an EBITDA level. And it's mainly explained by the improvement of cost of the business and the lower financial cost of the Group.

Regarding nonrecurring items, mainly include the contribution of the net capital gains from asset rotation of roughly EUR66 million. That had the Company to offset some negative depreciation charges that we have of EUR12 million due to the repositioning CapEx, mainly [New York]. And also the payment of redundancies linked to the efficiency plan, roughly EUR3 million. Just for your information, both are gross capital gains and taxes from asset rotation, all these items are include under nonrecurring items.

Finally, total net income of the Group reached EUR100 million; of course helped by the higher contribution of net capital gains from asset rotation, but also a very solid performance of the business. Including the hyperinflation accounting effect of IAS 29 at the [bottle] level, total net income will have been, or has been, EUR107 million, showing a positive impact due to the results of the financial income from the appreciation of the fixed assets that we own in Argentina.

Moving to page 11, I will highlight the continuous solid operation cash flow performance of the Group, roughly EUR172 million. That has allowed the Company to reach a cash position of EUR273 million as of the end of September, bringing down the net financial debt to roughly EUR208 million as of the end of September; and when we compare with roughly EUR655 million by the end of 2017.

This is a really key milestone for the Group, considering the deleverage past that has been accomplished. Also that will imply if we achieve the EUR260 million that we feel very comfortable with the EBITDA target, that imply net financial ratio of the Company, the range will be between 0.8 and 1 times by the end of 2019, versus the 5.6 times that we had at the end of [2015]. And also I will say lower than the initial 2019 target range that we provide to the market of 1 times to 1.2 times.

It's also very worth mentioning that by the end of -- at the end of September, as I mentioned, the cash position of the Group was EUR273 million in cash. And on top of that, we have more than EUR300 million in available credit lines, out of which EUR250 million are related to the long-term syndicated credit facility that is fully available.

With regards to the -- mainly the main (inaudible) of the Group and related to the CapEx payments, for the nine-month period this has been roughly EUR73 million; and mainly due to deployment of the works rate to the repositioning of the key assets for 2018.

And I will forecast to close 2018 with a lower figure than expected in terms of CapEx, roughly EUR125 million. There is no delay on the repositioning of the assets. It's mainly linked to the calendar of the payment of that CapEx that will be paid at the beginning of 2019. Additionally, remember the Group paid during -- in July a dividend -- a gross dividend of close to EUR39 million.

On slide 12, also I will now provide to the markets the changes in the shareholding structure that Ramón already covered, and also the key change of control clauses that will affecting Group. Regarding the 250 -- the change of control that was related to the long-term RCF, we already announced that the waiver has been obtained by all the lenders. We got up a waiver at the beginning of September. Therefore, the long-term facility is fully in place.

For the bond that it was due -- is due in November 2023 -- the EUR400 million of the standing bond; also due to the change of control and the close implying that change of control, NH has offered all the bondholders the possibility to repurchase all the outstanding bond, the 101% principal amount. The tender amount has -- the process has been finalized, and the tender amount reached only EUR3.2 million of total nominal.

Regarding the change of control that was linked to the management of the Hesperia hotels, we also disclosed the presentation on the main impacts and agreements that are in place. The resolution of that contract was signed at the end of October, with effective resolution as of the end of November. And the refine of the net price will amount to EUR20.1 million. And of course there will be no obligation to pay the third installment of EUR11.6 million that was due in April 2019. The payment of this refund of the net price is expected to be done by the end of November -- November 30 of this year.

Regarding also this agreement, also it's implied the sale of the Hesperia brand that will amount EUR1.4 million. And the net price as we have announced, the net price refund, combined of course with the net fees that the Group has received both in 2017 and in 2018, align also with the sale of the Hesperia brand will allow the Group to make a very profitable investment for this period despite the exit of Hesperia.

To conclude, these results -- I will highlight that the solid results of this nine-month period, combined with a very strong trading and the visibility that we have for the fourth quarter, will support and allow us to confirm the EUR260 million of EBITDA as the guidance for the year. As Ramón mentioned also, the performance of October has been extremely positive, with a like-for-like year-to-date growth of 4% versus the 3.6% that we had for the nine-month period; and with Spain and the other main cities in Europe, very sound growth.

So after covering the key milestones of these results, and now we'll be very happy to answer any questions you might have. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions). Guilherme Sampaio, CaixaBank.

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Guilherme Sampaio, CaixaBank BPI - Analyst [2]

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My question really relates to Minor Hotels. They said in the past that they wanted, in H2, remain a leasing company. I don't know if they continue seeing this scenario as the best case, or if -- even in if finding another investor, they could thinking about delisting NH. Do you have any information on this front?

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Ramón Aragonés, NH Hotel Group, S.A. - CEO [3]

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Well, at the beginning of the call, I think I have already explained in that, the strategy foreseen by Minor for ending 2019 with a comfortable level of leverage. I refer you to the results communications for further information. But so far, we know they want to keep the Company listed.

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Guilherme Sampaio, CaixaBank BPI - Analyst [4]

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Okay. Thank you very much.

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Operator [5]

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[Daniela Longou].

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Daniela Longou, - Analyst [6]

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Just wanted to follow up on this question about Minor. And I wanted to ask whether you envisage any changes in the Board of Directors, following Minor now owning 94% of the Company. You do have some independent members, some executives; clearly, some that already are representing Minor. But I'm wondering whether you envisage some changes as a result of this -- well, change of control, in a way.

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Beatriz Puente, NH Hotel Group, S.A. - CFO [7]

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Thank you, Daniela. Regarding the Board composition, we have no further information that the one that has be provided in the prospectus so far the tender offer. Therefore, we have to refer to that information.

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Daniela Longou, - Analyst [8]

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Okay.

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Operator [9]

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Joao Safara, Banco Santander.

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Joao Safara, Banco Santander - Analyst [10]

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This is Joao Safara from Banco Santander. I have three questions. The first one is just trying to get some -- get some feedback from you or some color from you in terms of what you expect next quarter's performance in Barcelona. Obviously, comps seem to be much favorable in the fourth quarter, but I really would like to have some further visibility on this particular city.

Then the second question is more related to 2019. If you could give us just an overview in general terms, how do you see supply/demand in your markets for 2019? You mentioned in the call that you're still seeing oversupply in LatAm, mostly in Colombia. Is there any other markets where you see supply being an issue for 2019? So that would be my second question.

And then the third, just a detailed question on the asset rotation you did this quarter. If you could elaborate on exactly what was the source of the proceeds in this quarter. Thank you.

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Ramón Aragonés, NH Hotel Group, S.A. - CEO [11]

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Okay. The first question regarding Barcelona, the fact is October has been a fantastic month. It has grown more than 10% comparing the previous year. And again, it's going really, really well. Maybe it's too soon to come to a conclusion. But it seems that the situation is changing, little by little. I would like to remark that it's maybe too soon, but apparently the situation is getting better.

Regarding the 2019, we're quite optimistic. We don't perceive any problem in order to have less demand in any place. We are still positive regarding Madrid. We think that in 2019, it's going to be an extraordinary month in Madrid for different reasons. For example, we will have the final of the Champion League here in Madrid. That is very important for us because we have high inventory in Madrid. And there are a lot of congress too, so we expect a fantastic year in 2019 in Madrid. And for the rest of the region, where we have presence, we don't perceive any problem.

Let me remark that for 2019, we keep with the same guidance of EUR285 million we have already communicated to the market, despite the loss of fees from Hesperia. That will be possible by the improvement of the budget with some additional savings coming from the personnel model and some extra revenues from some new hotels contract signed in the year, not to mention the extra fees from the Tivoli hotels that Minor has already announced that will be managed by NH. So we can guarantee the 2019 guidance.

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Beatriz Puente, NH Hotel Group, S.A. - CFO [12]

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Regarding the third question on more color on the asset rotation that the Company has done: the main contributor of that asset rotation -- apart, of course, of Barbizon that we already provided to the market all the numbers -- and the third quarter comes from the transaction that we closed last year is linked to the sale of some options that we have on the German asset, and that we have cashed in this year. And also a very small hotel of 64 rooms in Benelux; but the main contributor in terms of cash comes from the caching of the sale of one option that we divest last year.

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Joao Safara, Banco Santander - Analyst [13]

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Okay, thank you. Can I do a follow-up or just on the -- you mentioned on the Tivoli hotels. So, my idea -- and correct me if I'm wrong -- is that the fees that you would get from adding the Tivoli hotels to your portfolio, for managing their hotels, would sort of compensate the Hesperia hotels. Is that correct? Or is there any figure been unveiled that I'm not aware of?

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Ramón Aragonés, NH Hotel Group, S.A. - CEO [14]

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No. We have just talking about it. Of course, we can compensate with these extra fees from Tivoli. But I would like to remark that we have already done a good job to reduce the gap, with increasing their budgets, with extra savings. We have also signed a new contract. I think we can compensate, without any problem, this loss from Hesperia. On the other hand, we need to talk with Minor about the management contract. We are just starting with this, let's say, negotiation.

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Joao Safara, Banco Santander - Analyst [15]

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Okay, thank you.

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Operator [16]

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Javier Pinedo, Exane.

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Javier Pinedo, Exane BNP Paribas - Analyst [17]

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Just a follow-up on the Spain market. When we look into 2019, how do you think prices could grow next year, excluding the championship? I mean, overall as a trend?

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Ramón Aragonés, NH Hotel Group, S.A. - CEO [18]

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Well, we are optimistic about 2019 in Spain. We expect all the growth will come through ADR, especially in the main cities, and some volume in the secondary cities. It's then, for example, the last week we perceive a last-minute pick up, quite important. And honestly, we are not worried about Spain in 2019.

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Javier Pinedo, Exane BNP Paribas - Analyst [19]

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Okay. So basically you think there is still room for growing prices in the country.

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Ramón Aragonés, NH Hotel Group, S.A. - CEO [20]

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Yes, of course. Of course. Not to lead it, but of course we'll keep growing. Especially in the main cities, like especially in Madrid and Barcelona. It depends of the [mice demand]. We don't perceive problems from leisure. But maybe it would be necessary to have more demand from the congress segment to have a sustainable growth.

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Javier Pinedo, Exane BNP Paribas - Analyst [21]

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Understood. Thank you.

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Operator [22]

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(Operator Instructions). We have no more questions.

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Beatriz Puente, NH Hotel Group, S.A. - CFO [23]

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Thank you very much for attending the call. As always, very happy to follow up with any further questions you may have.

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Ramón Aragonés, NH Hotel Group, S.A. - CEO [24]

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Thank you very much. Bye-bye.

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Operator [25]

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Ladies and gentlemen, this concludes the conference call. Thank you all for your participation. You may now disconnect.