Accor SA (AC) Earnings Call Transcript & Summary

Thank you for standing by. My name is Ellie and I will be your conference operator for today. At this time, I would like to welcome you to the Accor 2023 Half-Year Results Conference Call. [Operator Instructions] I'd now like to hand you over to Martine Gerow, Group CFO. Martine, you may now start the session.

Thank you, and good morning, ladies and gentlemen. Thank you for joining us on this call, which is my first earnings call as the CFO for Accor. So let's just dive right into the presentation for our first half results. And we'll start with the financials on Slide 3 of the presentation. So we are very pleased with the performance in the first half. We've seen continued solid growth momentum and strong earnings and cash flows. Our RevPAR is up a very healthy 38% versus prior year, and that's on a like-for-like basis in the first half and 25% in the second quarter, which is also very solid and as compared to 2019, we actually saw an acceleration of the growth in the second quarter. Our pricing momentum continues contributing about 2/3 of the overall RevPAR growth with occupancy gains contributing for about 1/3. Our net unit growth actually accelerated this quarter, reaching 3.5% when you measure it over the last 12 months, and that was driven both by a higher number of openings as well as lower churn. And this translated into group revenue of EUR 2.4 billion, which is an increase of 35% versus prior year, again, on a like-for-like basis. Now moving to earnings and cash flow. We delivered strong earnings and cash flow in the first half. Our EBITDA more than doubled versus last year to EUR 447 million, and services to owners was positive in the first half, which is in line with the STO guidance we shared with you during the Capital Markets Day. Recurring free cash flow also significantly improved versus prior year to EUR 157 million, primarily driven by EBITDA growth and that was partially offset by higher working capital reflecting the higher activity. And I'll remind everyone that we do have a seasonal working capital with H1 being much lower than H2 because of working capital. So in light of these results, we have raised the full year guidance for EBITDA to EUR 930 million to EUR 970 million for 2023. So as guide in starting with RevPAR, which is presented on Slide 4, which is well balanced across both divisions. And we've shown that the contribution of rates and in blue the contribution of occupancy to the growth in RevPAR. So starting on the left, Premium, Midscale, and Economy division posted a RevPAR growth of 26% in the quarter versus prior year. And as you can see, that's driven by strong pricing gains and occupancy, which is actually now close to 2019 levels. Moving to the region, Europe and North Africa, RevPAR was up 20% in the second quarter versus prior year. And just to give you a bit of color on some of our key markets, France remains strong with large inflows of international leisure and business gas in Paris for large events. So we have the Bourget Air Show, we got that of course, one of ours. Now to note that riots in early July did not have a significant impact on our sonar booking as far. In the U.K., we saw a very, very balanced performance across London and the province. And Germany, we were pleased to improve significantly in the second quarter and actually now back about 2019 levels. Now moving to MEASPAC, second quarter was up 37% in RevPAR versus last year. Really, really good performance in either East Africa despite difficult comps, particularly in Saudi Arabia. Growth in the Pacific is in line with the previous quarters, which is encouraging considering that Australia recovered earlier as you may recall. Southeast Asia and India is well above 2019, notably in large cities and not supported by the return of international business guests. And in China, we've seen a strong acceleration despite what is still a very limited flight capacity in this region. So moving to the Americas, which, as you know, is dominated by South America for Premium, Midscale, and Economy, the RevPAR in the second quarter was up 24%, with stable occupancy as the region recovered faster than the other regions. And Brazil, which is our main market in this region, occupancy is slightly above 2019 and rates are significantly better. And I will now move to Luxury and Lifestyle on the right. So we posted a RevPAR growth in the quarter of 24% versus prior year with, as you can see, near balance pretty balanced across occupancy and rate gains. But the growth in this segment is in line with the growth in PME and that is good because you may recall that again, that segment recovered faster. So Luxury is second quarter RevPAR was up 25% versus the second quarter. Luxury accounts for about -- actually slightly over 70% of the room revenue of the division, and it's mainly Fairmont and Sofitel. And as we saw in PME, the region MEASPAC was a key contributor to the growth, are going to have a very strong presence in this region. And finally, Lifestyle, second quarter RevPAR was up 20% versus last year and like for Luxury, Lifestyle had recovered so much faster in 2022. But to note that RevPAR is now twice -- more than twice the level of 2019, and this is actually driven by the resource component of our lifestyle portfolio. Speaking of portfolio, let's move now to Slide 5, where we see the breakdown of our hotel portfolio by division with Premium, Midscale, and Economy on the left side of the slide, and Luxury and Lifestyle on the right. So as indicated in my introduction, overall net unit growth for the group accelerated to 3.5% in the second quarter, again, on an LTM basis and was well balanced across both divisions. The majority of openings came from conversions, which demonstrates the strength of the Accor brand portfolio. Premium, Midscale, and Economy portfolio grew by -- net portfolio grew by 3.6% over the last 12 months, driven by MEASPAC and China, which demonstrates the strong recovery in the momentum in this region. Luxury and Lifestyle portfolio grew by 3.4% over the last 12 months, driven primarily by smaller, which as you know is our Lifestyle brand. We do expect the growth to pick up materially in the second half based on the planned openings for Luxury and Lifestyle. Total pipeline is 217,000 rooms, notably driven by PME, which benefited from strong signings in the quarter. And you can see our fee per room is in line with the guidance that we shared with you at the CMD and to know the 1-2-3 ratio in favor of Luxury and Lifestyle. Overall, we confirm our annual net unit growth guidance between 2% and 3%. Bear in mind that in the last 12 months, no consultation of 3.5%, it does embark a strong second half of 2022, and that effect was subside as we lap over those 2 quarters. I will now move to Slide 6 with the revenue breakdown by segment. So the group revenue, again, reached EUR 2.4 billion in the first half, up 35% on a like-for-like basis. On a reported basis, you see the growth is a bit higher at 39% due to the consolidation of Paris Society, which sits in the hotel assets and other segments and which we acquired at the end of last year. For Premium, Midscale, and Economy, like-for-like revenue growth is 34% versus prior year with a revenue of EUR 1.4 billion. Management and franchise revenue was up a very healthy 39%, which is well above RevPAR, thanks to a strong recovery in incentive fees and we're actually very pleased with our strong growth in incentive fees in the first half. And this demonstrates the solid operational performance of the hotels across really all regions and segments. Now services to owners also grew slightly faster than RevPAR. And finally, hotel assets and others was up 24%, which is primarily driven by Australia. And again, the recovery took place earlier in this region hence the somewhat lower growth in this activity. Turning to Luxury and Lifestyle. The like-for-like revenue was up 40% in the first half, to reach slightly over EUR 1 billion. Management and franchise revenue was up 58%, again, significantly outperforming the RevPAR growth, driven again by the very significant growth in incentive fees. Services to owners in line with RevPAR and hotel and assets on a reported basis, mainly -- sorry, which like the acquisition of Paris Society. So let's take a closer look at M&F fees on Slide 7. For premium mid-scale and economy, all the regions are delivering solid growth with MEASPAC leading the part, if I may say, with 68% growth in the first half. Growth in Luxury and Lifestyle M&F fees was also very strong at 58%, with both activities growing well above RevPAR and again, driven by the growth in incentive fees. The share of incentive fees within M&S is actually now back to 2019 levels. So I will now turn to Slide 8. As again, in the introduction, the group's overall EBITDA in the first half more than doubled versus last year, reaching EUR 447 million. And it's really the combination of strong recovery in M&F EBITDA driven by solid growth in both divisions and cost discipline on services to owners, which led to a positive EUR 21 million EBITDA for STO as compared to an EUR 87 million loss in 2022. Regarding Premium, Midscale, and Economy, EBITDA is up 71% on a like-for-like basis to EUR 330 million. M&F EBITDA is up 33%. STO EBITDA is back in positive territory, again, after being negative last year due to the step-up in marketing efforts that we did to support the rebound of travel. And as for hotel assets and other, EBITDA slight decrease is related to cost pressures we've seen in our Australian operations. Turning to luxury and lifestyle. EBITDA more than doubled to EUR 174 million in H1, driving about 50% of the growth in EBITDA for the group. M&F EBITDA jumped by 76% like-for-like with a very solid operating leverage. For STO, I mean, the same comment as for PME, which expect EBITDA slightly positive as well. And as for hotel assets and other, again, EBITDA mainly reflects the acquisition of Paris Society. And finally, to point that we have helped our holding cost, the cost for the holding flat to prior year. So moving on to the rest of the income statement on Slide 9. We achieved a net profit of EUR 248 million in the first half versus EUR 32 million in the prior year. Now I'm not going to go through all the elements of the income statement, just point out a few highlights. And I'll start with the share of net profit of associates and JV, which turned positive at EUR 9 million versus a loss of EUR 27 million in prior years. And this improvement essentially in a sense from our 30% share in AccorInvest, -- with the recovery of the European activity, AccorInvest reported a significant result improvement as well. Our nonrecurring items was actually not material in the first half. Net financial expenses benefited from higher interest in common cash equivalents but was negatively impacted by noncash items, which included FX and change in fair value of investments. Speaking about cash flow, I'll now move to Slide 10. The recurring free cash flow reached EUR 157 million in the first half as compared to EUR 41 million in prior year, and it's really mainly driven by the growth in EBITDA. So the main highlights on cash flow I'll point out are 3. First one, the cash cost of net debt decreased to EUR 28 million, and that's, again, mainly due to higher interest in commons. Over 90% of our debt is fixed. Recurring investments slightly increased to EUR 80 million in the first half. For the full year, we continue to plan a level of around EUR 200 million for recurring investments, and that really reflects the group's acceleration in the development of Luxury and Lifestyle, which requires higher key money. And finally, the working capital change is negative EUR 88 million versus a negative EUR 25 million last year, and that really reflects the strong growth in the business. And as I pointed out, our working capital is seasonal, our recurring free cash flow is seasonal, and we do expect this working capital impact to reverse in the second half. Finally, net debt reaches EUR 1.8 billion, a slight increase versus December 2022, and this is due to some one-off items essentially such as the sidebar advanced report - sorry, advance payment reversal and the [indiscernible] tax arbitration. So to close this presentation before I turn now the floor back to you. Let us move to Slide 11 with the key takeaways of the first half. As I just shared with you, we had a solid momentum in the second quarter, and we expect a sounding end this summer, which is on the back of high comps. We had also a good sum last year. And so with this backdrop and taking into consideration the current macroeconomic uncertainties, we have raised our guidance for the full year of 2023. The growth in RevPAR is now expected at the top end of the 15% to 20% range, and our consolidated EBITDA is now expected between EUR 930 million and EUR 970 million for the full year. So I thank you for your attention, and I will now open the floor for questions.

[Operator Instructions] We have our first question coming from Vic Stern from Barclays.

First question is just talking about the RevPAR for the Q2 did come in a little bit better than consensus was expecting, but the EBITDA was pretty much in line. So just trying to get if there's anything to call out there in terms of phasing of costs, incentive recognition in the first half versus second half, really just sort of the implied drop-through of that RevPAR, which still seems a little bit lighter expectations. Second one on the demand outlook, as all of it sounds pretty confident. Just are there any cracks anywhere? And specifically, just Australia, we're starts to have flatlined now, it's one of your biggest markets. So just thoughts there on the outlook and the potential to continue to see year-on-year growth in that market or any risks that you think it could turn backwards. And then finally, when you see the trends playing through in the luxury segment in the U.S. where some of that very extreme pricing growth we've seen is now just starting to pay back a bit. How does that leave you feeling about the potential to sustain the current sort of very significant price increases you're seeing in some areas, and I'm thinking more into the next 6, 12 months?

Thank you for your question. In terms of the RevPAR growth being slightly above consensus, really -- I mean, really nothing to signal here. We -- as you know, we recognized incentives on a quarterly basis on investee basis. So there is some, let's say, judgment that comes into that, but nothing to underline on that. Regarding the outlook, as I commented, Australia did recover faster. And so you see a softening, let's say, of the growth versus farther but that's to be expected as you come closer to the recovery, your sequential growth rate will slow down. But on the other hand, China is -- which is also in this region has accelerated and still has very strong potential given the very limited flight capacity in this region. And I think your last question was, is there any crack in the model? Again, thus far, we see very sustained demand going into the summer and no sign of a -- so other than the obviously, quarter-over-quarter growth rate, which as we lap over recovery periods, will somewhat soften.

Thank you. So just coming back on the first one then about that flow-through to EBITDA. So sorry, is the point then that the way in which you receive the incentives or you sort of account for the incentives is more sort of back-end skewed and therefore, you sort of effectively having a better EBITDA/Revenue flow through from the RevPAR H2 versus H1?

I wouldn't say -- I'm not sure I would say it's back-end loaded, but we have a really slow visibility of the incentive fees at the end of the year. And so during the year, we do estimates and they're fairly there, obviously, fairly nearing that respect.

[Audio Gap] it's going to come from Richard Clarke from Bernstein.

Just I guess this is your first session as new CFO at Accor and the release looks very similar to a normal Accor release. Any sense of what you might change? You've mentioned incentive fees a few times already, will you start systematically reporting that? Anything you'd like to change in the presentation? And second question, just on the NUG, we have this Hilton report yesterday, and they were saying that we're in this kind of air pocket at the moment but guided that NUG would accelerate by a percentage point into next year and then another percentage point effect for the into the year after that. Is that what you're expecting as well you'll begin to kind of build back up to that 5% NUG pre-Covid over the next couple of years? And then just a third question, appreciating the Potel & Chabot deal is very small, but a little bit of a departure from the message of the CMD that no M&A was being looked at really. Are there other deals like that? I mean this is a simplifying deal, are there other JV assets that you want to consolidate? What's the sort of scope of the -- that sort of consolidation investment phase that we might see?

Richard, thank you for this. With respect to your first question, I have not thought as to whether there is anything that I like to change in the earnings release. Allow me some time to do that, if at all. Regarding the net unit growth, we do see -- and you have indicated this at the Capital Markets Day you reducing acceleration as we are as we did in the outer years, and that will be, if you recall, [indiscernible] has been by the Luxury and Lifestyle and actually, the openings that are planned in these portfolios or this division for the next year is very strong. With respect to Potel et Chabot, I mean that's part of the strategy that we have to simplify our portfolio of investments, and we have not -- we have no plans to make further M&A deals as we discussed in the CMD. And Potel et Chabot are already 47% shareholder, and this investment is quite -- the structures that we have to expand our food and division offering in the Lifestyle and the receiving segment.

We have our next question from Jaina Mistry from Jefferies.

It's Jaina Mistry from Jefferies. Lastly, really great to hear from you. I also got 3 questions. The first question is kind of going back to Vicki's question, but I appreciate there are some big events coming up in H2 and also the Olympics next year. How are you thinking about reinvestment and potential for more marketing required to really capture on these events and growth in H2 and H1 next year? And just on the back of that, how should we think about the sensitivity of EBITDA to RevPAR growth? Can you give any guidance as we used to in the past around 1 percentage point of RevPAR translates to excess EBITDA? And my second question is around the shape of growth really for next year. We've spoken about net unit growth being a bit more challenged versus history. But macro side, do you think that price growth can offset any weakness in supply? Anything you can say to help us think about the shape of growth would be very helpful. And then lastly, in terms of your pipeline, do you have any visibility around what proportion of your pipeline is under construction today.

Thanks for your question, Jaina. With respect to the RevPAR and the big events and whether we need to invest more into marketing, we've invested where we need to invest in marketing that to the investment that was made last year, and we made a strong commitment and we've met that commitment in the first half of to being positive. So will remain on that path. In terms of the in terms of the shape of the growth, as you may recall from the Capital Markets Day, what we've guided in the medium term is a RevPAR growth of 3% to 4% for the group. So we have, in some sense, factored in the fact that the recovery is obviously well underway and the growth -- the rate of growth will slow down as a matter of fact. We also have a 3% to 5% net unit growth in the medium term as per the Capital Market Day. So when you combine the 2 it's still due to revenue growth, which is in the mid-single digit. In terms of the pipeline, I don't have the -- I can't comment on what is new construction versus what is actually under development. But what I can say is that our conversion rate remains very, very strong, and that's the strength of the group because of the preference, but also the depth of the portfolio of brands and our conversion rate is above 50% for the pipeline, which is a very strong conversion rate.

And then just going back to the first question. Do you have any guidance around sensitivity of EBITDA to RevPAR growth today?

So we actually don't -- we don't give sensitivity on RevPAR. It's really -- there's many elements that go into this. And so -- this is not a data that we're communicating...

We have our next question from Leo Carrington from Citi.

Just a follow up on some of the earlier questions on Richard's question on the net unit growth progression. The pipeline is obviously stepping on very well. Can you give an indication on how this -- how the signings are progressing within that? I assume this is signings driven. And how did the pipeline signings tied to the pressure on openings for the rest of the year? Are you finding projects are sitting in the pipeline for longer between signing and ground breaks and so we can expect a bit more of a pipeline build into H2? And anything on signing would be really helpful. Secondly, and timing to its theme, can we give some more color on the portfolio conversion deal in Japan? How that deal originated? What the indications are for the business in that region? and more broadly that the scope of further similar deals - And then lastly, in terms of the credit rating, I know it's under your -- out of your control, sorry. That it's -- is it reasonable for us to expect that the ratings agency will revisit the ratings again this year? And maybe ask you I'm conscious of the performances, your Accor's performance is tracking well, well ahead of the S&P assumptions from earlier this year?

Thank you for your questions, Leo. With respect to the pipeline, we don't see a longer conversion time between signing and opening, as I mentioned, we do expect a very strong opening in the second half and our conversion market is strong and actually that what we see is a growth in the pipeline in the next 6 to 12 months. With respect to Japan, what that allows us to do is to double the number of properties we have in Japan. Japan is a really, really good market. It's a market in which our incentive fees in particular are very strong. So we're quite pleased with this deal. And with respect to the credit rating, it's not entirely -- but we do have a regular with the agencies, and we're obviously planning to meet with them following the release of our first half earnings that will be in the post summer, and we will take it one step at a time, but strong results in the first half should come in help.

Okay. If I might just follow up on the second one on Japan. Does the doubling your sidebar mean potentially an ability to grow more in the country going forward, giving more scale? Or what might the implications of the [ Dublin size B ]? And then just very briefly on scope for further deals, not similar deals, not necessarily in Japan, but outside...