Minor Hotels Europe & Americas, S.A. (NHH) Earnings Call Transcript & Summary

Welcome to NH Hotel Group Full Year 2021 Results Presentation. I now hand over to the speakers.

Hello, everyone. Welcome to NH Hotel Group Q4 and Full Year 2021 Results Conference Call. This is Fernando Navarro from Investor Relations. To start, our CEO, Ramon Aragones, will share with you the performance of the company in the year with a clear improvement in the second half and until Omicron arrived. He will also share our view for 2022 and the potential impact of the recent events in Ukraine. Then our CFO, Luis Martinez, will provide a more detailed description of the results and will dive in the cash flow detail, liquidity and the reinforced capital structure of the group after the milestones achieved in the year. At the end, we will open a Q&A session to answer any questions you may have. And now I hand over the call to Ramon.

Thank you, Fernando. Good morning, and thank you for joining us today. This is Ramon Aragones. The recovery phase started in mid-2021 with the lifting of restrictions, and the group achieved a continuous month improvement during the third quarter and most of the fourth quarter until Omicron arrived. And the robust after some improvement was explained by the gradual return of business customers as well as the small business group resulting in a relevant recovery in the main cities of Europe that had a weak performance during the first half of 2021. The performance achieved during the second part of the year, despite the slowdown in December due to Omicron, doesn't change our mid- and long-term scenario, but it's true that since yesterday, we have a new short-term uncertainty. Omicron has impacted the business since mid-November till mid-February. So a 3 months impact, being January the most affected month. Since beginning of February, a pickup in reservation has been observed, being more pronounced since mid-February. The pickup has been strong for the second part of February, and it's been even stronger for March and for the second quarter of the year, allowing to foresee that the recovery from this wave should be faster compared to previous ones. Despite this negative impact of Omicron in the first quarter of 2022, we have foreseen more normalized activity levels from March, April onwards. We have proof that when occupancy recovers, our pricing strategy is very successful. The ADR protection, we have applied during the second half of 2021 is the foundation for the pricing strategy in 2022. Regarding the potential impact of the recent events in Ukraine, I will give you our view later. After sharing our view for 2022, let me recap the highlights of 2021 on Page 4 and 5 of the presentation. Revenues grew 55%, reaching EUR 834 million compared to EUR 540 million in 2020. The second half represented 74% of the revenues of the year, implying EUR 618 million in second half of the year and EUR 216 million in first half of the year. The revenue increased in H2 has been plus EUR 388 million compared to the minus EUR 93 million decrease reported in H1. Occupancy more than doubled from 19% in H1 to 49% in Q3 and 50% in Q4 despite lower occupancy during last week of the year after Omicron impacted in our business. The earlier easing of restriction in Southern Europe allowed a faster recovery, reaching occupancy levels in H2 above 60% in Spain and more than 50% in Italy. Central Europe and Benelux restated early restriction in mid-November due to Omicron, reaching occupancies in half 2 between 50% and 40%, respectively. The pricing protection strategy since the second half has allowed ADR to increase from EUR 73 in first half to EUR 91 in Q3 and EUR 98 in Q4. This constant improvement is as explained by the return of business travelers since September, resulting in a relevant recovery in the key European cities. Business reactivation since mid-2021 and strict cost control throughout the year resulted in an EBITDA improvement of plus EUR 201 million, excluding IFRS 16, out of which plus EUR 12 million was reported in H1 and plus EUR 188 million in H2, resulting in an EBITDA recovery from minus EUR 290 million in 2020 to minus EUR 90 million in 2021. This improvement has been supported by the positive impact of the 83 direct state aid subsidies received throughout the year and mainly in Central Europe. Let me highlight that out of the EUR 188 million EBITDA improvement in the second half, Q4 represented plus EUR 135 million, implying a positive EBITDA of EUR 54 million. Excluding the EUR 40 million of subsidies recorded in Q4, positive EBITDA was reached in the quarter compared to minus EUR 7 million reported in Q3. All in, recurring net losses were reduced by EUR 260 million, reaching minus EUR 155 million compared to EUR 371 million in 2020. Reported net loss, including nonrecurring item, was minus EUR 134 million, an improvement of EUR 303 million compared to the previous year. The positive contribution of the nonrecurring items in 2021, mainly the net capital gain from asset rotation partially offset by the refinancing impact and severance costs compared to the impairment provision recorded in 2020. Well, to conclude my intervention and before turning the call to Luis Martinez, I want to remark our confidence in the recovery of the industry. The temporary slowed down in the last 3 months due to Omicron is behind, and we are seeing a faster demand recovery compared to previous COVID waves. With regards to the new uncertainty due to the events in Ukraine, I would like to remark that NH has no exposure at all in the region. Our Russian clients represent less than 0.5% in our 2019 revenues. So it's not a figure, a strong figure market for us. To be honest, it's too early to assess how our industry and the expected economic recovery will be affected in the short term from this new geopolitical uncertainty. Our view as of today is that this conflict can affect inflection and energy cost, but visibility is very low to quantify the impact at this stage. We don't see European traffic being affected by it. Of course, it can delay the return of long halt travelers, especially the U.S. travelers. Summarizing, we keep an eye on this conflict, but with the initial visibility that we have, it's very early to assume that it may compromise our target of coming back to positive results in the year. Now Luis give you more details on the results and balance sheet.

Thank you, Ramon. This Luis Martinez speaking. Good morning, everyone. Jumping into the details of the results on Page 7. Reported revenue in 2021 grew by 55% or EUR 294 million, reaching EUR 834 million, of which EUR 216 million in the first half and EUR 618 million in the second half. In Q4, revenue reached EUR 345 million despite the slowdown in December. This revenue figure includes EUR 40 million from direct government subsidies, mainly from Central Europe. Exuding these subsidies, Q4 revenue figure is higher than the EUR 273 million reported in Q3 despite the slowdown of the last weeks in the year as a consequence of Omicron. By regions, I'm moving to Page 9. Our performance has been achieved in Southern European countries as a consequence of lower and earlier easing of restrictions. In Spain, like-for-like revenue grew 72% in the year. Secondary cities performed better throughout the year, 77% growth compared to Barcelona, 62% and Madrid, 58% that had a better performance in the second half of the year. In Italy, our like-for-like revenue increased by 84%, driven by Rome 109%, Milan 84%, and secondary cities 84%. I would like to emphasize that Rome and Milan, the ADR in the month of October was above 2019 levels. In Benelux, like-for-like revenue was flat versus 2020 due to the higher dependence on long-haul travelers in cities like Amsterdam and Brussels. However, Dutch secondary cities grew 7%. In Central Europe, like-for-like performance, excluding direct government subsidies, was also stable compared to 2020. Berlin 12% and Munich 9% that benefited from higher leisure demand had a better performance than secondary cities, minus 11% and Frankfurt that showed minus 30%. Lastly, in LatAm, Mexico revenue grew by 52% in local currency, Colombia and Chile by 70% and Argentina by 46%. Moving to Page 10. Payroll in 2021 increased EUR 12 million, meaning 3.9% and operating expenses EUR 53 million, meaning 21.7%. Reported lease payment and property tax grew by EUR 18.1 million, explained by the higher fixed rent concessions achieved in 2020. Excluding perimeter changes on IFRS 16, fixed rent savings amounted to around EUR 46 million in 2021 compared to EUR 63 million in 2020. Reported EBITDA with IFRS 16 improved by EUR 211.8 million, reaching EUR 216.4 million in the year. Excluding IFRS 16 impact, recurring EBITDA improved by EUR 200.6 million, reaching minus EUR 89.8 million. Recurring net losses were reduced by EUR 216 million, reaching minus EUR 155 million compared to minus EUR 371 million in 2020. This implies an improvement of more than 58%. The positive contribution of the nonrecurring items in 2001 that amounts to EUR 21.4 million is mainly explained by the net capital gain from the sale and leaseback of NH Collection Barcelona Calderon that amounted to EUR 47 million, partially offset by the refinancing impact, mostly noncash FX related to write-off of expenses of previous debt instruments that were refinanced and also by the severance payments related to labor restructuring processes. This positive nonrecurring compares with a negative contribution in 2020, mainly due to the impairment provision of the previous year. All in, reported total net loss, including nonrecurring items, reached minus EUR 134 million, an improvement of EUR 303 million compared to 2020. Jumping to cash flow generation on Page 11. I would like to highlight that the business reactivation has boosted a free cash flow generation of almost EUR 30 million in the second half of the year and recall that average occupancy in H2 has been around 50%. The strengthening of the capital structure completed in 2021 with the EUR 106 million capital increase and EUR 127 million coming from asset rotation in Barcelona that I mentioned before, has allowed to report a decline in net financial debt from EUR 685 million in 2020 to EUR 568 million in December 2021. The positive working capital contribution is explained by the significant weight of noncredit customers that pay a checkout, implying an immediate cash in for the company, also explained by the strong recovery of receivables and the optimization of the supply chain financing. Positive VAT contribution is related to our timing effect and the postponement of some tax facilities in Benelux. CapEx paid throughout the year reached EUR 37 million, and will continue very limited during the coming quarters. Moving to Slide 12. The group closed the year with an available liquidity of EUR 511 million, out of which EUR 244 million is available cash. The liquidity strengthening during 2021 has permitted to start reducing gross debt while preserving liquidity. As such, the EUR 236 million growing amount of the RCF has been fully reimbursed in 2021, and now the RCF is fully available with a total limit of EUR 242 million. All refinancing processes completed in 2021 that is EUR 400 million bond and the EUR 242 million RCF and the EUR 250 million ICO syndicated loan results in a debt profile with no relevant debt maturities until 2026 and a full covenant holiday for the entire 2022. This means a very strong financial position to capitalize on the industrial recovery in the coming future. And now after covering the results of the year, the team would be very happy to answer any questions you may have.

[Operator Instructions] We have the first question from [ Albert Jack ] from [indiscernible].

First one was relatively short term. Could you give us some more color about the bookings you have in terms of corporate clientele, miles segment and so on? And the second question, which is more midterm, in terms of development, do you see any positive or negative impact on the actual situation? And what is your view in terms of segmentation and quantitative development?

Okay. Thank you. As I mentioned before, right now, the situation has totally changed, not only in the B2C segment, also in B2B segment. We are having more and more bookings coming from the miles segment, especially for the short time period. There is a lot of interest in the second half of the year, where more and more demand, but we don't expect to complete big events until the second half of the year. But right now, we have more than EUR 300 million on the books and half of these revenues are coming from the miles segment, which is quite interesting. For us. But listen, we are beating every day, they pickup. So 2 days ago was the highest pickup since the beginning of the COVID in 2020. But yesterday, we beat again. So the evolution of the pickup is being extremely, extremely positive. And regarding your second question, development. Now we perceive a great opportunity for us because I think -- don't forget that most of our lenders are institutional funds. And they had the opportunity in the COVID to see how we have managed the situation, how we have had controlled the cost side and compare with our competitors, and they are interested in doing more things with us. And considering the appetite that there is in the market right now, we perceive a great opportunity to grow, not only in the urban segment, also in the leisure segment through HNA contracts. In terms of segmentation, I would say, maybe we pursue right now similar opportunities in the urban segment and in the leisure segment for the company. And in terms of brands, we realize that we will have a great opportunity to grow in Europe through Anantara, the high-end brands as Minor and also with our brands in NH, our comparative brands like NH Collection and NH Hotel. So we are optimistic in terms of development. We have already a pipeline with more than 25 hotels signed, and we are now negotiating a good number of hotels, I would say. And we expect to concrete some deals in the coming weeks.

May I ask you a following question, so regarding profitability. If we take in consideration all the saving plan and the optimization plan that you've put in place in 2020 and 2021, what is the operating leverage you expect to keep in the future to improve your profitability on a structural base?

No. I think as you mentioned, we have done a great effort to reduce our structural costs in the past. Now we are focused on growing. We are focused on increasing our revenues. I think we have already a very, very, let's say, effective model. We don't see the need to reduce cost because I think we have been one of the...

Sorry, that was not my question. To be clear, if you come back to the kind of revenues you had in 2019 in 2023, I don't know, what would be the level of profitability you would expect at the same level of revenues?

Sorry, I didn't get your point. It's going to be similar to 2019. We expect -- as you mentioned, we expect to reach the same level of revenues in 2023, '23, even higher because we are increasing our portfolio, and we have now and Anantara hotels, which allow us to increase the total revenues of the company. So we expect to have the same level of profit in 2023, even higher. So don't forget that our model, it's quite important to reach a certain level of revenues. One, we reached a certain level of revenues, the level of conversion is extremely high. That's the reason why we are able to return to the previous revenues that we had before COVID with a doubt, we will reach the same level of profitability that we used to have in the company.

Okay. But do you have a quantification of this improving profitability or not?

More than EUR 100 million.

For the moment, we have no more questions. [Operator Instructions] Next question from [ Tom Terry ] from [indiscernible].

My question was just more on the cash flow. Luis, we right in thinking there was a EUR 32 million outflow of working capital in Q4 and with the acquisition disposal, I see the cash balance is more or less the same between Q3, which was EUR 270 million and Q4, which was EUR 244 million. So I attribute that to the outflows in cash, but with the capital increase and the acquisitions and disposals, have you just repaid debt? Or is that sitting -- what have you done with that cash? Is that available to you? Or is that...

So yes, we have repaid the RCF entirely. The RCF was fully drawn. It was an amount of EUR 236 million by midyear. Remember that we do this RCF, it was coming from 2016. It was never drawn. And we do it for the first time in 2020 and thanks to this capital increase and the disposals of the Calderon Hotel in Barcelona, we have repaid entirely. Now it's fully available. And RCF is a revolver, so it's fully available.

And the -- and you had a EUR 20 million outflow, right, working capital, in Q4?

Well, this is the natural working capital. You have a concentration. We had a concentration of activity at the end of the year. And we have a natural working capital management and yes, an overflow that, of course, it's already paid in January. This outflow normally happens every year, last days of the year of December, with the holidays, with limited resources in the teams. Normally, you have this overflow of payments, not only OpEx also CapEx. But yes, it's already monetized in our cash flow of the following year.

Next from [indiscernible] from Shenkman Capital.

I had a couple of questions, if you don't mind. The first one was, are there any cash outflows planned associated to any of the subsidies that you received in Q4, so specifically that EUR 40 million? And my second question is, are we expecting any further inflows from an asset sale? Correct me if I'm wrong, but I thought there was another asset sale with a potential EUR 75 million inflow that was planned, but maybe I've made a mistake there.

Okay. So regarding the subsidies, these subsidies are nonrefundable or direct subsidies is not financing. It's a direct subsidy that the German government, in this case, gives to the companies that are suffering losses to make sure that they continue honoring their obligations to pay rent, to pay suppliers, to pay payroll and it's a nonrefundable subsidy. The subsidy has already been collected. So it's what, as we explained in the presentation, it's in the P&L of 2021 because we recognize that because it corresponds to 2021. And the payment from the government arrived last Friday, actually. So there is no risk of cash on this subsidy. Then, of course, there may be more subsidies, we don't know. I mean, obviously, we know that the government, especially in Central Europe, Austria, Germany as well are working on this type of subsidies, it's their decision. We also received similar subsidies in Switzerland, more or less EUR 1 million. So overall, we have been very active seeking the subsidy. But again, it's not financing. It's not financing like we have also raised financing with the support of the government. For example, when I mentioned the ICO, ICO is the Spanish government bank, let's say, financing branch. And we have this loan that has a guarantee from the Spanish -- Kingdom of Spain through ICO, but that's a refundable loan, that's the EUR 250 million. The subsidies are nonrefundable. Okay. And regarding asset disposals, Ramon will answer you.

Yes. Well, asset rotation is always on the table. But listen, we are -- right now, we are not analyzing a big transaction in the coming months. There is some small transaction, but not relevant. We will conclude in the coming months for a total of EUR 30 million more or less. But for the rest, listen, I don't know, for the moment, it's not something that we are considering. But if we analyze something, of course, we will communicate as soon as possible, to all of you.

There are no more questions. [Operator Instructions] Next question from [ Laura Anzai ] from [ MSS ].

Just going back to cash flow generation, maybe. I obviously understand that Q1 is just seasonally a lower quarter. But could you give maybe some indication of what kind of cash burn you expect during the quarter?

Laura, so we haven't provided numbers on Q1. We are still with management figures. But I can say that as of yesterday, 24th of February, our cash balance was well above EUR 220 million. So you can make your numbers.

Great. That's good color. That's very helpful. And I assume that sort of for the future quarters, you expect cash flow to be in the positive territory. Is that fair to say?

Absolutely. Yes. So typically, Q1, historically, we have a cash burn. Obviously, January -- there is some cash burn in January that February is, let's say, neutral. And March is probably also going to be in the breakeven area. And from April onwards, our expectation is to start generating cash flow. As you have seen in the company and this is something that we can say because we have proved that over the second half of the year. This company, we need about certain levels of revenues that are typically around EUR 100 million with normally generate cash, okay? About EUR 110 million, EUR 120 million. Of course, we start generating a positive free cash flow. And you can see second half of the year, free cash flow of EUR 29 million of pure free flow. I mean, the operating cash flow has been above EUR 50 million and excluding any extraordinary because the subsidies that we have recognized in the P&L, they were not collected. So actually, those subsidies have been collected now in February. Of course, it's also helping us with the cash flow of this first quarter. So they are also embedded in this period that I mentioned. But in the end, altogether, I am not concerned about liquidity. I would say that the cash flow is now becoming where it says, reaching a structural behavior, which I feel quite comfortable with it. And liquidity, as you can imagine, with the level of liquidity we have today, I'm not concerned at all.

[Operator Instructions] Gentlemen, we have no more question by phone.

Thanks very much for joining us today. In case you have any more questions, just feel free to contact the IR department, and we'll be very happy to try to help you with any questions you may have. Thank you very much, and have a good weekend.

Thank you very much.

Thank you very much. Thank you for your attendance.

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