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

Ladies and gentlemen, welcome to NH Hotel Group Full Year 2022 Results Presentation. I will now hand over to the speaker. Thank you.

Hello. Good morning, everyone. This is Javier Vega-Penichet from Investor Relations. Welcome to NH Hotel Group fourth quarter and full year 2022 results conference call. To start our CEO, Ramon Aragones, will share with you the drivers behind the reassuring closing of the year with a stable demand and solid price development. Then our CFO, Luis Martinez, will provide a more detailed description of the results and will dive in the strong cash flow generation and the implied leverage reduction that continues strengthening our financial position. 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, Javier. Good morning, and thank you for joining us today. This is Ramon Aragones speaking. 2022 concludes with a increasing fourth quarter with a sustained demand and strong ADR. The speed of the recovery in 2022 has within our expectation allowing to exceed since April all metrics of 2019. The sustained reactivation of both leisure and business travelers, together with a solid pricing strategy at strict cost control and helping to offset the inflationary pressure. Our commercial strategy focused on a strong [indiscernible] demand and segment optimization has allowed to surpass base 2019 like-for-like ADR by 11% in the 12-month period. At good level, ADR reached EUR 122 compared to EUR 103 in 2019. The price development has fully offset the lower occupancy in 2022, 61% compared to 2019 to 72%. As a result, RevPAR in 2022 reached EUR 74 same level of 2019 based on ADR instead of occupancy due to the remarkable performance in the last 9 months, fully offsetting Omicron impact in Q1. Excluding Q1, like-for-like RevPAR was plus 6% versus the same period of 2019 as ADR grew 14% and occupancy was 5 points lower than in 2019, once again, based on our strategic focus on rising ADR in set of occupancy. The return of the business travelers in June has permitted to recover similar B2B pre-pandemic revenue levels. This is explained by the strategic focusing on small- and medium-sized enterprises as big corporation took longer to activate. On the cost side, our discipline initiative of our purchasing platform to mitigate the increasing price pressure has allowed to overall offset 1/3 of the inflection rate in 2022. We expect this pressure to continue during the first half of 2023 and to slightly moderate in the second part. In energy costs, we benefit for terms agreed in 2021, and the group took advantage of certain subsidies received in 2022, implying that the EBITDA conversion rate of 37% achieved in 2022 cannot be sustained in 2023 because this subsidies we got during 2022. The financial position of NH has continued to improve with a net financial leverage reduction of EUR 260 million in 2022. Strong operating cash flow generation EUR 270 million, together with asset rotation, EUR 68 million, certain subsidies collected in Q1 2022, around EUR 40 million, as I mentioned before, limited CapEx, EUR 49 million, have permitted to decrease net financial debt down to EUR 308 million with an implied leverage of 1.2x. Comfortable liquidity allowed to continue the reduction of gross financial debt that started in 2021 with the Asia repayment. As a result, EUR 200 million of the ICO COVID-related loan has been voluntarily repaid during 2022, and the outstanding EUR 50 million was repaid in January 2023. Therefore, floating debt exposure has decreased from 47% to 25%. Let me now recap the main operating highlights of the year. Total revenues reached 1,759 million or 101 million in Q4 compared to 1,780 million in 2019 and 134 million in 2021. Excluding Q1, revenues were 12% higher compared to the same period of 2019 since April to December. Occupancy improved from 40% in Q1 to 69% in Q2 and Q3 and 65% in Q4, sorry, reaching 61% in the year. Excluding Q1, like-for-like occupancy was 5 points lower than in 2019. We expect occupancy rate to continue slightly lower than in 2019 during the first part of 2023 due to the company strategic based on characterizing ADR instead of occupancy. Stable ADRs since April in the EUR 130 range. Like-for-like ADR growth versus 2019 was plus 11% and 14% excluding Q1. Excluding IFRS-16, EBITDA reached EUR 250 million, EUR 88 million in Q4, excluding Q1 2024 that was minus EUR 54 million. EBITDA since April exceed by EUR 32 million or 11.5% in the same period of 2019 with a similar margin 20%, despite the high inflation. Reported EBITDA with IFRS-16 reached EUR 190 million, which is 94% of the 2019 figure. All in, Net recurring profit in 2022 reached EUR 76 million, EUR 45 million only in Q4. First, positive annual figure since 2019. From Q2 to Q4, recurring net profit was 156 million, an increase of EUR 35 million versus 2019. Total net profit, including net capital gains from asset rotation reach EUR 100 million in 2022. To conclude, let me share with you that after the fast recovery in 2022, the good dynamics remain in the first months of the year, and we continue to foresee a healthy operation trend during 2023. Now Luis Martinez will give you more details on the results and balance sheet.

Thank you, Ramon. Good morning, everyone. This is Luis Martinez Jurado speaking. Jumping into the details of the annual results on Page 5 and focusing on top line, reported revenue in 2022 reached EUR 1,759 million, EUR 501 million reported in Q4. Inclined growth of EUR 952 million compared to EUR 834 million in 2021, a year that was highly impacted by COVID mobility restrictions. Compared to 2019, revenues increased by 2.4% or EUR 41 million despite Omicron impact in Q1 2022. Excluding Q1, let me remark that revenues were 12% higher implied an increase of EUR 160 million compared to the same period in 2019. Moving to RevPAR on Page 6, let me highlight the increase to EUR 74 in 2022, which is the same figure for 2019 due to the remarkable performance in the last 9 months of the year, fully offsetting Omicron impact in Q1. Excluding Q1, like-for-like RevPAR was 6% above the same period in 2019. As in our view 14%, occupancy was 5 percentage points lower than in 2019. By region, higher activity level was achieved in Southern Europe due to earlier lifting of restrictions. Moving to Page 7, we have seen a fast recovery in all regions, being Southern Europe above 2019 comparable revenues. In Spain, like-for-like and refurbishments, revenue grew EUR 216 million with a very healthy evolution of the secondary cities throughout the year and a relevant upturn in Madrid and Barcelona due to the reactivation of the business travelers seen mid Q2. Spain has reached higher comparable revenues versus 2019. In Italy, like-for-like and refurbishments revenue increased by EUR 154 million with extraordinary performance in Rome and secondary cities throughout the year, in line with higher revenues for perfect 2019 in Q4 and Q3. Italy also reached higher like-for-like revenues compared to 2019. In Benelux, like-for-like on recoveries revenue grew by EUR 198 million with better evolution impact secondary cities and Brussels. Amsterdam has been improving quarter by quarter. In Central Europe, growth of EUR 119 million on a like-for-like and refurbishment basis despite the EUR 79 million of direct profit-related subsidies in 2021 versus EUR 70 million in 2022. We also see a healthy recovery in cities, especially in Berlin and Hamburg in the case of Germany. Lastly, in Latin America, we report revenue growth across all countries with a stronger recovery in Argentina, both by Colombia and Chile and a slower pace in Mexico. Moving to Page 8. Both payroll and operating expenses increased by 78% in 2022 due to higher activity. Let me highlight that our cost discipline and the strength from our purchasing platform, [ operala ] to mitigate the increasing price pressure has allowed us to reach 48% GOP conversion rate. Reported lease payments and property taxes increased EUR 142.8 million in the year due to increasing variable rents as business growth and the comparison with 2021, a year that was impacted by fixed rent concessions and other contractual features. Reported IFRS EBITDA improved by EUR 302 million, reaching EUR 519 million in the year, which represents 94% of the 2019 figure. Excluding IFRS 16, recurring EBITDA grew by EUR 340 million reaching EUR 250 million, EUR 88 million in Q4, due to a 37% conversion rate supported by the ADR strategy and strict cost control. Excluding Q1 from 2022, when we reported minus EUR 54 million EBITDA from April until December was EUR 32 million or 11.5% above the same period of 2019, with a similar margin of 20%, despite the high inflation . Reported net recurring profit reached EUR 76 million, EUR 45 million in Q4, setting the first annual positive figures in 2019, implying an improvement of EUR 231 million compared to minus EUR 155 million in 2021. From Q2 to Q4, recurring net profit was EUR 156 million, an increase of EUR 35 million versus 2019. Nonrecurring items reached EUR 25 million, mainly explained by the net capital gains from [indiscernible] transactions, partially offset by a provision for a settlement of a tax claim in the levels. On total net profit in 2022 improved by EUR 234 million, reaching positive EUR 100 million compared to minus EUR 134 million in 2021. Moving to the capital evolution on Page 9. The financial position has continued to improve with a net financial debt reduction of EUR 260 million in 2022 despite the EUR 31 million increase in Q1. As a result, net financial debt decreased to EUR 308 million with an implied leverage of 1.2x. It's good to recall that the net financial leverage decreased already started in 2021 with a EUR [ 117 ] million reduction during the year. Moving to the retails. Operating cash flow, including working capital, VAT and corporate taxes was EUR 276 million in the year. The working capital investment is explained by the business growth, the return of the B2B segment that implies credit customers and the multiplication of certain supply chain processes partially offset by subsidies registered in Q4 2021 and collected in 2022. CapEx payment reached EUR 49 million in the year is still at a very low level as a result of the limited investments executed during the past 2 years due to COVID, but it will gradually increase during the coming quarters. As a rotation EUR 68 million of net cash proceeds from several transactions that include in Brussels, over 2 small noncore assets in Germany and the Netherlands and a minority stake hotel in the U.K. Moving to Slide 10. The group ended the year with an available equity of EUR 569 million, out of which EUR 302 million is cash buy backs and EUR 267 million available credit lines. The debt refinancing achieved last year to displace a relaxed debt maturity profile with no relevant maturities until 2026. In 2022, EUR 200 million of the ICO COVID syndicated loan was voluntarily repaid. Additionally, the remaining EUR 50 million was repaid in January 2023. So this financing facility is completely repaid. As a result, floating that rate has been -- floating rate debt has been reduced from 47% to 25%, implying strong protection against rate increases. And now after covering the results of the year, the team will be very happy to answer any questions you may have. Thank you for your attention.

[Operator Instructions] The first question comes from the line of Joao Safara Silva from Banco Santander.

I have 2 questions. The first, just if you could talk a bit on the outlook for 2023 in terms of the visibility you have for the year and any data regarding the early bookings, and -- that's my first question. The second question is just in terms of capital allocation to understand what are your priorities? Is it shareholder remuneration increasing CapEx to grow further the business. Just if you could give us some highlights on what's your view there for going forward.

So regarding the 2023, our visibility right now is that we don't see problems from demand perspective. I think the demand remains strong. So we don't see any problem for reaching our goals for 2023 in terms of revenue. This is not going to be a problem, generally speaking. We have some demand progress in Germany where the recovery is not so fast that we are having in the rest of the European countries and because of the economic factors, but in the rest of Europe, the demand is very strong, especially in Spain and Italy, and we expect the same in Benelux. So the moment is not happening, but our prospects for the coming months are positive in all these countries. And South America is recovering. But as you know, the total worth of South America and our P&L is not really important. The main concern comes from cost side. We are suffering big time in terms of cost because they're increasing because inflation, the CLA, this is really knocking our P&L. For the moment, we are offsetting the effects of this increasing because the decreasing of ADR that we have been able so far, to say, to the prices. But this is the main problem that we see in the future because, obviously, we are suffering big increases, of course, especially in Northern Europe, in Germany, the CLA in some cities, is too rigid. So it's not easy. It's not easy to offset all this increasing for the moment, as I mentioned before, thanks of the huge demand, we have been able to offset all this increasing, but this is the main concern for the future. Also, we are still waiting for the recovery of the American market, which is quite important for our luxury segment and Antara. Obviously, Ukraine war is not helping this recovery, but we expect maybe in the second half of the year. since could change depending on the evolution of the conflict in Ukraine. And also, we expect the recovery of or the Chinese market. As you know, we have -- Minor International is our main shareholder with a very strong presence in China, in Asia sorry. So we should expect some kind of increasing of the Asian tourists, one of the situation and stable, especially in China, but we see that is going to happen maybe in 2024 of the [indiscernible] 2023, not immediately.

Okay. The second point, Joao. Well, you have seen the healthy balance sheet after -- the exercise we did in 2021, we were financing the reduction of debt, we already completed in 2021. The accelerated debt reduction during 2022, which is on a very healthy balance sheet, healthy liquidity. And of course, we see that this year company generates cash. So the plan is, of course, going back to reasonable levels of CapEx in line with what the company was in pre-COVID times, bear in mind that after 2 years of very limited investments, we see opportunities to renovate starting hotels, to catch up certain CapEx investments that were suspended. And now, of course, you will see CapEx going up during 2023. Repaying debt is also an option. We will be very opportunistic on retaining that. You have seen us strongly committed to reducing this to repay in this alone. Of course, there is room for the debt repayment, but there is no -- we need to be very economic driven been debt. So yes, we will continue to repay debt, but many opportunities. And asking for the question about dividend, for the moment, there is no dividend in the agenda. But of course, the company has the possibility to pay dividends. We are for compliance with our dividend covenants in our financial agreements. But as of today, the dividend is not for 2023.

Just a follow-up, if I may. Can you quantify the CapEx that you're planning to deploy in 2023?

Yes, the CapEx in 2023 will be above the EUR 100 million figure of which 50%, I say above, I'm not saying it's EUR 100 million, it's probably above, and of which around 50% of that will be [indiscernible] CapEx. But you evolution of the business. So of course, our works, if things are going well, we will invest on the CapEx. If not, we will reduce it, okay?

[Operator Instructions] The next question comes from Daniela Lungu from First Sentier. .

Yes, hello? Can you hear me?

Yes.

I have a couple of follow-up questions to what my colleague from Santander asked. And then I think another extra 1 or 2, if that's okay. For the CapEx guidance, I didn't quite catch what you said, 50% would have been refurbishment CapEx? If you'd be able to clarify if it don't mind. But what I was trying to understand is if this is more maintenance CapEx that you have to invest because the buildings otherwise become a little bit more derelict or is it more investment CapEx where you do get a return from refurbishment. So that would be one question. Should I ask all of them in one go?

Yes. So I said 50% is what we call repositioning CapEx, and repositioning CapEx is what you have said is the CapEx on which we expect a return. So it's upgrading and it's not mention CapEx. CapEx is, of course, something that we will also tackle during 2023 because maintenance CapEx is also very important. But I say repositioning CapEx, which is .

Okay. Yes, that's clear. Second question, can you give us a little bit of color or guidance on the interest cost that you might have going forward. So I can see the average cost last year was 4.2%, and you tell us what the maturities are. But can you guide us a little bit of what your cost roughly might be this year or -- and maybe the next year in this current high interest rate environment?

Of course. So you know that after the EUR 250 million ICO-syndicated loans because the government -- Spanish government's financial branch. This ICO-syndicated loan repayment that was totally and the EUR 242 million actually have repayment in 2021, we are talking about more than -- around EUR 500 million of debt repayment in 2021 that we will do. Those financing agreements were closing rents. After debt payment or after the completion of this repayment, only 25% of our debt is exposed to [indiscernible], so it's very I would say, . The main facility or the main instrument is the bonds is a public bond, a 4% coupon with . So it's very simple to say that the is benefit. Average cost today is 4.2%. And we don't foresee a reason to expect changes during the [indiscernible] 2023. .

Okay. That's great. And then the last one is on the cost side. And presumably, a lot of that cost increases and pressure on costs are coming from the energy costs. Are you hedging your energy costs going forward? And if so, what percentage is trade? I mean, many of your peers in other sectors as well. have been hedging the gas and electricity costs last year or even at the beginning of last year. I think the one that had a triple goal to predict what's going to happen, they were hedging at the beginning of 2022. So my question is, are you had a call on energy cost, or you are expected to pretty much the fluctuation of energy prices?

While we said in 2022, we benefit from agreements reached in 2021. And now in 2023, we are till expose to the evolution of the market. We used to negotiate in every market, according with the circumstances of the market. We are very active negotiating with , and so far, the strategy of the company has been positive for us. So I think it's true that the energy cost is a factor that we have to take into account in 2023, that nobody can anticipate what's going to happen. But for the moment, we feel comfortable with our -- the way that we have managed this specific area of cost, and it's included in our budget, and we expect in the coming years some reductions the market evolution is positive. At the moment, it's not a big concern because we are considering in our budget is increasing cost.

Okay. And then the biggest line of your cost is labor cost reason, you are increasing salaries, wage inflation as it's everywhere. You'll able to give us a figure as to how much wage inflation you're going to face this year, and I know you operate in many countries. So it's going to be quite an average what type of labor inflation?

It's extremely complicated because something in spec than we have 17 CLA in every single region of the country. So it's quite complicated to have an average of total cost in Germany 2 digits and in Benelux is almost 2 digits, it depends. Every country is different. Generally speaking, is the highest increasing of labor costs I have ever seen a -- what is happening right now is complicated. So fortunately, as I mentioned before, for the moment, we are able to offset all these increasing because huge demand that we are having that allowed us to increase the ADR and offset this increase of cost. But I hope the European governments will control the inflation in the coming year -- in the coming months because it's going to be a problem in 2024 because nobody can guarantee that we are going to be able to keep with this strategy of increasing prices forever. But we have to think that in 2024, inflation will go down.

[Operator Instructions] Ladies and gentlemen, there are no further questions. Dear speakers, back to you.

Okay. Thanks a lot for your time. Happy to have any follow-up calls with any of you from -- with the IR team and enjoy your . Thank you very much. Bye.