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Edited Transcript of NHH.MC earnings conference call or presentation 12-Nov-19 11:00am GMT

Q3 2019 NH Hotel Group SA Earnings Call

Madrid Dec 7, 2019 (Thomson StreetEvents) -- Edited Transcript of NH Hotel Group SA earnings conference call or presentation Tuesday, November 12, 2019 at 11:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Beatriz Puente Ferreras

NH Hotel Group, S.A. - CFO, Executive MD of Finance & Administration and Executive Director

* Javier Vega-Penichet

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

* Ramón Aragonés Marín

NH Hotel Group, S.A. - CEO, MD & Executive Director

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Conference Call Participants

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* Andre Juillard

Deutsche Bank AG, Research Division - Research Analyst

* Isabel Carballo

BBVA Corporate and Investment Bank, Research Division - Chief Analyst

* Joao Safara Silva

Grupo Santander, Research Division - Equity Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to NH Hotel Group Third Quarter 2019 Results Presentation. I now hand over to the speaker. Thank you.

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

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Hello. Good morning to all. Welcome to NH Hotel Group Third Quarter and 9 Months 2019 Results Conference Call. This is Javier Vega from Investor Relations. Our CEO, Ramón Aragonés, will share with you main guidelines of the strong sound results released yesterday with a focus on the top line. Then our CFO, Beatriz Puente, will provide a more detailed evolution of the results and a strong financial position. She will explain IFRS 16 accounting impacts from 1st January, both in P&L and balance sheet and will share with you our guidance regulation for 2019. Finally, a Q&A session will be opened.

So let's start with our CEO comments. Please, Ramón?

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Ramón Aragonés Marín, NH Hotel Group, S.A. - CEO, MD & Executive Director [3]

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Thank you, Javier. Good day, everyone, and thank you for joining us today. This is Ramón Aragonés. Before getting to the results, let me share with you the progress with minor integration and alignment of interest between both groups. NH has started to operate in July 3 -- I'm sorry -- in July, 3 Tivoli hotels in Lisbon, and they are long-term sustainable lease agreement. The rest of the Tivoli portfolio is operated under management contracts in Portugal and Brazil. This agreement have contributed up to September with EUR 4.8 million of EBITDA for NH, and our expectation is that could contribute with EUR 12 million on an annual basis.

Additionally, the first Anantara urban hotel will be launched soon in Dublin with the market hotel being the third Anantara in Europe. The hotel, with 187 rooms and 8 meeting rooms, is located in the Docklands, one of the most attractive and dynamic areas of the Irish capital. Both groups continue working together on additional synergies, mainly through further growth opportunities in the luxury segment with both new signings and running opportunities and the access to the Asian customer through the combined loyalty program and cross-selling opportunities.

Moving to the results and in line with the performance of the first half of the year. The group's operating trend and business improvement remain strong. Main highlight on Page 3 of the presentation, the combination of plus 5.7% revenue growth, with prices contributing with 100% of the RevPAR growth and cost control measures has led to an EBITDA margin improvement of plus 1 percentage point. EBITDA, excluding IFRS 16 adjustment for comparability, reached EUR 209 million, implying a growth of plus EUR 23 million or 13%. Reported net recurring income reached EUR 62 million, which represents an increase of EUR 17 million compared to the same period of last year.

Slide #5. Total revenue grew plus 5.7% in the first 9 months, reaching EUR 1.3 billion, implying an increase of EUR 67 million. Remark the like-for-like or comparable revenue growth at constant currency, which has been plus 4.8%. Europe continued to show a strong growth of plus 3.5% boosted by the excellent performance in Spain and healthy growth rates among the rest of the countries. Including the refurbished hotels to the like-for-like perimeter, revenue grew plus 4.5% at constant exchange rates. Perimeter change contributed with EUR 24 million, mainly from Tivoli portfolio integration, Anantara Villa Padierna in Marbella, NH Toulouse Airport, NH Collection Gran Via and NH Venice Rio Novo in Venice.

Well, moving to Page 6. RevPAR growth in the first 9 months has been fully achieved through ADR. Both RevPAR and ADR grew plus 4.5%, reaching an average daily rate of EUR 102. For a better understanding of the RevPAR trend, it is worth considering the plus 3.6% growth in the like-for-like of our comparable perimeter in the first 9 months of the year. Main highlights by region are: Spain, plus 11%, with a continued recovery in Barcelona, plus 70% (sic) [17%], both on activity and prices; and excellent performance of Madrid, plus 30% (sic) [13%], mainly through ADR with a very strong Congress calendar. In addition, solid evolution of secondary cities with plus 5% growth in RevPAR. Italy, plus 1%, with a good evolution of Rome, plus 2%; while Milano, plus 1%, showing a better performance in the second part of the year. Benelux, plus 3%. Recovery continued in Brussels, plus 11%; and good performance of Amsterdam, plus 2%. In Central Europe, plus 1%, with a good performance of Hamburg, with plus 4%. German secondary cities, plus 2%; and Austria, plus 9%. Frankfurt reported negative evolution due to the negative trade fair calendar and higher supply. Lat Am, minus 3% RevPAR growth in euro terms with a mixed evolution by region.

Going to Page 7. Relative RevPAR evolution versus competitors fell by 0.3 points, with higher RevPAR performance in Spain and Benelux, constantly increasing market share and supported by the higher quality of our hotels. This higher quality and improved customer experience is perceived and recognized by our customers, and the group continues to improve average scores in both TripAdvisor and Google Reviews.

So before handing over to Beatriz that will give you more details on the results and on the financial strength of the group, I want to conclude that the performance of 2019 will allow NH to report record figures. And with the visibility of the fourth quarter, I am delighted to confirm the initial guidance we disclosed at the beginning of the year. Beatriz?

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Beatriz Puente Ferreras, NH Hotel Group, S.A. - CFO, Executive MD of Finance & Administration and Executive Director [4]

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Thank you, Ramón. This is Beatriz Puente speaking, and good morning, everyone. Going to the revenue performance by region, on Page 8 of the presentation, and I would like to emphasize the like-for-like performance. Spain, a remarkable like-for-like growth of 9.2%, explained by the outstanding recovery of Barcelona, with a 16% increase. Very strong performance of Madrid, 10% increase due to the strong year in Congresses. Also, it has been sustained, this very good performance in Spain, due to secondary cities with a 5% growth. Additional revenue growth coming from the integration of Tivoli in Portugal.

Regarding Italy, 1.6% on the like-for-like portfolio, with a good performance of Milano, 1.4% increase, recovering from the drag from Q1 negative trade fair calendar, while Rome stood flat due to lower contribution from our business groups.

Total revenue of growth was 5.1%. That has been also pushed by the reforms executed last year to hotels in Rome and in Milano, and a new opening in [1] hotel in Venice. Speaking of Benelux, growth of 2.7% increase with, as Ramón has mentioned, with a very strong recovery in Brussels, 9% growth; on Congress Centre hotels, with a growth of 7%. Amsterdam performance, with a 1% increase, is affected by the lower contribution from business groups.

In Central Europe, the like-for-like performance, revenue nearly flat, a decrease of 0.2%, has been affected by the negative fair calendar in the third quarter of this year, with a higher impact in Frankfurt that has also suffered from new supply in the city. German secondary cities reported a growth of 1%.

Moving to Latin America. This region reported a growth of 5% in euro terms. That also is highly affected by the hyperinflation IAS 29 accounting rules in Argentina that was implemented from Q3 last year. By country, Mexico revenues growth are nearly flat at a constant exchange rate. And including the positive currency evolution of 5%, reported revenues increased also 5%. Argentina, as I mentioned, our revenues are affected by IAS 29. We provide full information in the report regarding this impact. And then regarding Colombia and Chile, revenues decreased 3% in local currency. And including the currency evolution also, the reported figures were affected, decreasing to 8%.

Looking at the cost performance of the group on Page 9 of the presentation. The focus continues to be on cost control and efficiency measures put in place by the group. That has allowed NH to report a healthy conversion rate of 53% at GOP levels despite the changes in perimeter and repositioning of hotels that explains roughly 59% of the increase on operating expenses.

More detail regarding the cost performance. Personnel costs rose roughly close to 6%, out of which, 56% of this increase, comes from the comparable perimeter due to the increase in collective labor agreements that has taken place in Spain, Germany and Benelux. The rest of this increase is explained by the change in perimeters -- in perimeter. Other direct operating expenses grew by 2.5%. The impact of perimeter changes and to lower -- extend the positioning of hotels explains roughly the entire increase in this cost.

Adjusted lease payment, excluding IFRS 16 accounting impact, together with the property taxes, increased roughly EUR 12.5 million. And again, a significant portion of this increase, roughly 42%, is explained by the perimeter.

Recurring EBITDA, we have cleared up for comparison purposes, IFRS 16 impact has reached EUR 209 million in the first 9 months of the year, implying an increase of roughly EUR 23 million, which implies a margin up of 100 basis points reaching 16.6%. Including IFRS 16, accounting EBITDA reported, as you have seen, reached EUR 401 million. Below reported EBITDA, if we move to Page 10 of the presentation, the amortization expense related to the write-off use amounts roughly to EUR 134.5 million and the net interest expense of the lease financial liability amounted to EUR 67.3 million. So we provide this breakdown for you to track down the performance of the recurring EBITDA.

All in, on net income level, the IFRS 16 net accounting impact was negative minus EUR 8 million, if we compare with not applying IFRS 16 this year. Therefore, reporting a net recurring income of EUR 62 million, significant improvement of EUR 16.4 million that has been explained by the continuous business improvement, the lower financial costs and despite the above-mentioned IFRS 16 impact.

Total reported net income reached EUR 66 million. Direct comparison is -- this started -- the same happened on the first half results in our first quarter results of this year by the positive contribution that we have last year from the disposal mainly of Barbizon. The decrease is now on this 9-month period, we are speaking of EUR 27.6 million, lower than the same period last year. As I said, are low -- due to the lower contribution of the nonrecurring activity. And if you compare both periods, it's roughly EUR 45 million less.

Moving to Page 11. The solid cash flow generation continues during this 9-month period. The group has closed the September with net financial debt of negative EUR 190 million, but with a very solid cash position of EUR 268 million. We have paid during the period CapEx of EUR 130 million and also the ordinary dividend payment of EUR 59 million. The operating lease liability according to IFRS 16 has not changed that much. It amounts to roughly EUR 2.1 billion on our balance sheet, but the group is really focusing on growing through profitable leases. It's worth mentioning that as at the end of September, on top of the cash position of EUR 268 million, the company has also available credit lines undrawn of EUR 304 million, out of which EUR 250 million are long-term RCF.

To conclude, and as Ramón has mentioned and we have reiterated and confirmed in this 9-month results, the solid results that the group has published and with the visibility that we have for the fourth quarter allow us to confirm the initial guidance provided to the market. EBITDA, recurring EBITDA of EUR 285 million and circa EUR 100 million of net recurrent income for the period. This targets has cleared IFRS 16 and IAS 29 accounting impacts and the positive contribution foreseen for the Tivoli integration that will be added to these figures.

After uncovering the key financial highlights of this 9-month period, now the team will be happy to answer any questions that you may have. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Isabel Carballo from BBVA.

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Isabel Carballo, BBVA Corporate and Investment Bank, Research Division - Chief Analyst [2]

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I want to ask about the outlook for Q4 especially in Spain and also related to that, your exposure to Catalonia.

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Ramón Aragonés Marín, NH Hotel Group, S.A. - CEO, MD & Executive Director [3]

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Well, thank you. In Q4, we are positive. October has been a very good month. We have reached the budget, too. The forecast for November and December are positive. So we expect to, as we said before, we expect to close the year reaching all our goals. To be more concrete, in Spain, we expect to grow at single digit, but it's still soon to come to final conclusions because, as you know, we have the climate summit which take place in Madrid. We don't have enough visibility right now, but depending on the evolution of this summit, it could be even better than we have forecasted right now. And regarding the situation in Catalonia, I would like to say that we cannot compare that to what happened 2 years ago. It's true that there is a certain slowdown, but it's too early to come to conclusion. If the situation keeps being the same, it will end up affecting us, but it's difficult to anticipate the impact. It will depend on the evolution of the situation. For the moment, we are managing quite well. Obviously, as I mentioned before, with a certain slowdown, but we need -- it depends of the evolution of the circumstances there.

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Operator [4]

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The next question comes from Andre Juillard from Deutsche Bank.

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Andre Juillard, Deutsche Bank AG, Research Division - Research Analyst [5]

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A few questions for me. First is about top line as well to have better visibility on what you are expecting in Benelux for the end of the year because Q3 has been especially strong in Belgium. Second question about top line, what do you expect to happen in Central Europe and especially in Germany as Q3 has been under pressure? And the third part of my question about top line is do you have any visibility on your negotiation about 2020?

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Ramón Aragonés Marín, NH Hotel Group, S.A. - CEO, MD & Executive Director [6]

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I'm sorry, you mentioned negotiations. What are you talking about, sorry?

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Beatriz Puente Ferreras, NH Hotel Group, S.A. - CFO, Executive MD of Finance & Administration and Executive Director [7]

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Do you mean the budget? No?

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Andre Juillard, Deutsche Bank AG, Research Division - Research Analyst [8]

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Yes, the budget and the price discussion with the intermediaries, OTAs and so on.

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Ramón Aragonés Marín, NH Hotel Group, S.A. - CEO, MD & Executive Director [9]

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Well, starting by the last question, we are still working on the budget. We will present to the Minor Board next week, but we will communicate to the market later on. Regarding the negotiation with the OTAs, et cetera, of course, we are taking advantage of the new situation. We are opening negotiations with all of them, OTAs, wholesalers, et cetera. And we are quite happy with the result of this negotiation; I think, extremely positive for both companies, for Minor and for NH.

Regarding the other question, in Benelux, let's say that the headquarter, we have the result in the headquarter especially in Amsterdam has been affected by, let's say, less group demand that has affected our other revenues. The reason why the level of growth has been lower than in the first half of the year. For the rest of the -- for the last quarter, we are positive. In October, the performance of Amsterdam and Brussels was very positive, and we expect the same for the rest of the quarter. So in short, we expect to close the year in Benelux according with the budget as with our expectation. And regarding Germany, it has been a complicated year. It's true that in the country, demand is slowing down but -- especially in Frankfurt because the calendar -- [somewhere] the trade fair calendars, but we are quite happy with our performance in the rest of the big city, like Hamburg and Berlin. And for the next year, I think the situation would be more or less the same. It's not a country that where we expect to grow double digit, of course. But I think we can expect a good performance in Germany in 2020.

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Andre Juillard, Deutsche Bank AG, Research Division - Research Analyst [10]

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Okay. Maybe another question with Minor. I'm sure that you have quite a decent visibility on future developments, but could you share what is planned in terms of next opening? Or is it something secret?

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Ramón Aragonés Marín, NH Hotel Group, S.A. - CEO, MD & Executive Director [11]

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Next opening, you're talking about hotels. I mean -- no? Are you talking about Europe...

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Andre Juillard, Deutsche Bank AG, Research Division - Research Analyst [12]

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Yes.

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Ramón Aragonés Marín, NH Hotel Group, S.A. - CEO, MD & Executive Director [13]

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Yes -- as you know, now we are in charge of the development of all the brands of the company, the Minor brands and NH brands in Europe and South America. In Europe, we have a very, let's say, good expectation. We are now dealing some new openings, especially in the high-end segment. And we expect to close this deal in the first quarter of the next year. Regarding Minor, Minor is now dealing some new openings with our brands. We expect to open an NH collection in Middle East, another one in Melbourne and another one in Singapore. So this is part of the agreement that we have reached with them. And we are quite optimistic about the development of both brands in both sides of the world, we say.

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Operator [14]

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(Operator Instructions) Next question comes from João Safara from Banco Santander.

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Joao Safara Silva, Grupo Santander, Research Division - Equity Analyst [15]

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Just 2 questions. The first one, it's more of a -- I mean, if you could help me understand where do we stand in terms of targets for synergies for NH coming from, obviously, integration within Minor. If there's any type of quantification that you expect to do of the synergies for next year. That's my question is, basically, if you could help me there. And then the second one, just trying to understand that the performance of Hoteles Royal because it's been a laggard for several years now. And I wonder as to -- I mean, I want to understand what are your initiatives there to change this?

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Ramón Aragonés Marín, NH Hotel Group, S.A. - CEO, MD & Executive Director [16]

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Okay. Well, regarding synergies, as you know, something it's complicated to understand where the increasing of sales are coming from. It's true that, as you know, before joining Minor, our total clientele coming from Asia was only 1%. That is increasing also from Middle East. So obviously, this is part of the cross-selling that we are getting from this new position with Minor. There are very clear signages coming from Tivoli. This year, we expect to close the year with EUR 6 million of additional EBITDA. And for 2020, we expect to reach about EUR 12 million of synergies coming from both agreements that we have with them, with the 3 hotels that we have under lease contract and the other management contracts. There are other synergies in terms of developments, in terms of salesforce that we are working together, trade fairs and many things, but it's complicated to quantify it, but it's been extremely positive for us, especially because, thanks of this agreement, we now have the possibility to grow in the high-end segment that was impossible for us before. And regarding Bogotá, regarding Bogotá, in Bogotá is -- Bogotá is getting better, especially in the capital of -- in the rest of the country, we -- it's not exactly the same situation, especially in Medellin, but Bogotá is having a very good performance right now. We are quite happy, and we expect to be even better figures next year.

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Joao Safara Silva, Grupo Santander, Research Division - Equity Analyst [17]

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And -- okay. Just a follow-up on the first question. If we think about the cost synergies and sharing of, let's say, the cost synergy savings between Minor and NH, is there any synergies already happening this year? Or is that something that we will have to wait a few more years to see?

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Ramón Aragonés Marín, NH Hotel Group, S.A. - CEO, MD & Executive Director [18]

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In terms of costs?

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Joao Safara Silva, Grupo Santander, Research Division - Equity Analyst [19]

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Yes.

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Ramón Aragonés Marín, NH Hotel Group, S.A. - CEO, MD & Executive Director [20]

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Well, as you know, I think the most important is to understand that we are very complementary companies. As you know, from geographical perspective, we have a strong presence in Europe and South America, and they are in Asia, Oceania and Africa. So from the third quarter perspective, there is no synergies at all. I mean most of the synergy will come from sales side, development side, system side, negotiations with OTAs. I think all the topics that we have already mentioned. But I think it's going -- it's been extremely positive for both companies. I don't know if you want to add something, Beatriz?

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Beatriz Puente Ferreras, NH Hotel Group, S.A. - CFO, Executive MD of Finance & Administration and Executive Director [21]

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Yes. So I think it was clearly stated when Minor also provided information or rationale for the acquisition of NH, the main synergies come from, what Ramón was saying, the opportunity to bring high-yield customer, Asian customer weight on our sales, it's lower than 1%. The synergies coming from integration of the portfolio that they have in Europe, that has already been done. The numbers are quite significant contribution for NH. As Ramón said, Tivoli will contribute with EUR 6 million by the end of this year. And on top of that, for next year will be nearly double. The rest will come from opportunities of growth. A clear example of that is we already have 3 Anantaras within the portfolio of NH. Likely, there will be some rebranding of some hotels, NH hotels. And as Ramón has said, we are also working on growth opportunities that will bring more Anantaras and offer us, NH, opportunity to grow in the high-end segment that for us was very difficult to acquire luxury brands. So all in, very positive contribution for NH, but the less will come from the cost side.

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Operator [22]

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(Operator Instructions) Your next question comes from Hidde Frequin, private investor.

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Unidentified Participant [23]

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Congratulations on the great figures, first of all. My question is whether you could comment on the disconnect with the share price and what you do for minority shareholders in terms of fiduciary duty and stewardship. How do you want to close that disconnect?

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Beatriz Puente Ferreras, NH Hotel Group, S.A. - CFO, Executive MD of Finance & Administration and Executive Director [24]

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Thank you for your question. Regarding what the company is doing for taking care of the minority interest, as you said, it's working hard on the business performance of the group and the results of the 9 months proved that. On top of that, the Board approved to put in place a liquidity contract. That continues to be well balanced, with half of the amount on the euros and also shares to make sure that as far as the Board can help to increase and finance liquidity despite, of course, having a very small percentage of our free float.

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Unidentified Participant [25]

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Okay. But maybe one follow-up question. I think Minor declared, when they did the take-over bid, that they would seek a situation where there would be another large shareholder and hence liquidity and, hence, less conflicts of interest. Could you comment on that? What the perspective is on that?

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Beatriz Puente Ferreras, NH Hotel Group, S.A. - CFO, Executive MD of Finance & Administration and Executive Director [26]

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I mean we can't speak on behalf of Minor. What we can tell you is that regarding any potential conflict of interest, it was announced and we shared that with -- in the CNMV through a very well-known fact that there is an agreement, inter-company agreement to make sure that we do all the transactions based on honest transaction-based market price. And a good example of that is the Tivoli integration. It has provided NH EUR 6 million, as I said, this year. And there is, as I said, an agreement on the website that it has been approved and shared with CNMV to make sure that there is no conflict of interest between our both companies.

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Unidentified Participant [27]

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Yes. Okay. But I would like to note that Minor made a $60 million profit on the transaction with NH and I'm sure the Board looked at it. But still, I think the situation, the current governance situation is not optimal. So I would be grateful if the Board could look at that.

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Beatriz Puente Ferreras, NH Hotel Group, S.A. - CFO, Executive MD of Finance & Administration and Executive Director [28]

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I think maybe -- sure. But I think there's a bit of confusion, and there was no profit. I know you mentioned the 6 million that we mentioned is the positive contribution to NH -- it's the EUR 6 million --

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Unidentified Participant [29]

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Yes, but Minor -- I understand from Minor's reporting that they made a $60 million on the sale leaseback of the hotels, which -- yes.

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Beatriz Puente Ferreras, NH Hotel Group, S.A. - CFO, Executive MD of Finance & Administration and Executive Director [30]

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It was sold to a third party, but happy to follow up with any questions you might have regarding that transaction. If you send to us, the IR department, you know that. But I think maybe there's a bit of confusion with the capital gain that you are saying that is through the disposal of the assets to a third party. It was not NH, but happy to follow up if you send to us --

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Unidentified Participant [31]

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No, no, no. It was Minor. It was Minor. Sorry. Just the point is that I think that the governance situation or the current structure with Minor having a large majority of shares, it's just not optimal. And my question was whether -- what the Board was doing on that. But you've answered it at least partly, so thank you.

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Beatriz Puente Ferreras, NH Hotel Group, S.A. - CFO, Executive MD of Finance & Administration and Executive Director [32]

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Thank you very much for your comments. And of course, we'll pass on the message.

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Operator [33]

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Thank you. Ladies and gentlemen, there are no further questions in the conference call. I now give back the floor to the company. Thank you.

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Beatriz Puente Ferreras, NH Hotel Group, S.A. - CFO, Executive MD of Finance & Administration and Executive Director [34]

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Thank you very much for attending our 9 months results. I'm very happy to follow up with any questions that you might have. Thank you.

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Ramón Aragonés Marín, NH Hotel Group, S.A. - CEO, MD & Executive Director [35]

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Thank you. Bye.