Scandic Hotels Group AB (publ) (SHOT) Earnings Call Transcript & Summary

Good morning, and welcome to the Scandic Hotels Group Q4 2022 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jens Mathiesen. Please go ahead.

Thank you very much, operator, and then good morning, everyone and thank you for joining Scandic's fourth quarter presentation. My name is Jens Mathiesen, I'm the CEO of Scandic, and I'm together with Asa Wiren, our CFO. We will talk you through the quarter and the full year result. So with that, please jump into Page 2. I am very pleased to present a solid fourth quarter that concludes a strong year. Net sales reached SEK 5.2 billion, which is actually an increase of almost 40% compared with Q4 last year and 8% or approximately SEK 400 million higher than what we saw in Q4 2019. We also delivered an improved result compared with last year with an adjusted EBITDA of SEK 476 million. The main drivers of the result were a combination of a stable market with continued good demand from both corporate and leisure, and good operational performance and very high efficiency and cost awareness in the organization. Prices also continue to increase in all our markets and we do report RevPAR of SEK 695 compared to SEK 510 in Q4 '21 and SEK 672 in Q4 2019. Note that we also had close to 6% more rooms at the end of this quarter compared to the end of the fourth quarter in 2019 when we compare the numbers. The occupancy rate in the fourth quarter was stable at 57% compared with 51% the year before in '21 and 62% in 2019. Occupancy levels are still slightly below '19 as you can hear mainly due to the lacking demand from intercontinental travelers from and to Asia, where, of course, several countries continue to be impacted by the pandemic restrictions, which we have seen in those markets. We can also see indications actually now that it is increasing. So increased intercontinental travel and countries as China, for instance, is picking up, still on lower levels, but picking up. We should expect increases to -- from those markets into Europe and to the Nordics, which, of course, will support occupancy in the longer term. The demand for meetings continue to be stable and was on par with 2019 levels during the fourth quarter. Demand for larger conferences and trade fairs are still lagging some compared with 2019 as these type of events take longer time to both plan and fill up. I want to highlight the strong free cash flow of SEK 945 million in a quarter -- in the Q4 quarter and we have also continued, as you see to reduce our debt quite heavily, which is now very stable and below pre-pandemic levels. Lastly, in the first quarter, we completed refinancing of our debt and credit facilities. The new financing facility reflects our lower debt level and also gives us the headroom that we need to execute on our strategy. Asa will, of course, give you much more on this in a more detailed way later in this presentation. So if you please turn to Page 3, here you can see quarterly adjusted EBITDA developments since the beginning of 2019. Adjusted EBITDA increased to SEK 476 million in Q4 compared with SEK 436 million in the same period of 2021. Excluding one-off, the adjusted EBITDA margin improved to 9.1% compared with 7.8% in 2021. The main drivers of the performance were continued high efficiency and cost awareness in combination with a stable market and solid occupancy levels and increased prices. We continue to be cautious in the ramp up of the organization and we have a sharp focus on maintaining high efficiency and cost control. If you turn to Page 4, I'm pleased with our performance in general of the full year results, net sales increased to SEK 19.2 billion, almost twice as much as what we reported in '21 and somewhat higher than the very strong year and record year in 2019. Adjusted for governmental support and other one-off effects of SEK 433 million, we delivered an adjusted EBITDA of SEK 2.1 billion and adjusted EBITDA margin of 11.1%, which is just above our financial profitability target of 11%. Including one-off, we delivered our best full year ever with an adjusted EBITDA of SEK 2.5 billion and a strong margin of 13.2%, and this result was boosted by one-off, we know, but we should also remember that 2022 started off with a very weak quarter in Q1 impacted by restrictions in several of our markets. So I think altogether, I am very pleased to say that we are pleased with this performance and our commercial ability to meet the fast-growing demand, we've maintained sharp focus on efficiency and cost control. We have [ been ] strengthening our portfolio significantly during the last year with 10 new openings and more than 2,800 rooms. We are, of course, very happy with the timing of these openings. We did delay some of them from the pandemic, but 10 openings in a strong market is very satisfactory for us. And I'll of course highlight a few of these projects later in the presentation. We also can say we had a strong free cash flow of SEK 2.2 billion for the full year and we have gradually reduced our debt, which has been a focus which at the end of the year was at a lower level than before the pandemic, including the convertible loan. So altogether, we have improved our position considerably. I'm pleased with the performance and how we have adapted to the rapidly improving market. So lastly, I also want to mention that the Board proposes no -- that no dividends are to be paid from this result. Please page -- move to Page 5. This one you know. Here you can see the monthly market occupancy in the Nordic countries. We have seen a similar pattern in all countries throughout the year with a very rapid improvement from March onwards as the restrictions were lifted from early and mid-February. This has been a broad recovery with strong demand both from leisure, corporate travel and for meetings. After a very busy summer, occupancy levels have stabilized during the fall at solid levels. However, as I mentioned, it's likely still lower than what we saw in 2019. Looking into the different segments, domestic travel is well above 2019 levels and they continue to lead this recovery, while intra-Nordic and European travel is strong, but still slightly below pre-pandemic levels. The main reason for the lacking occupancy is mainly due to the lower demand from intercontinental travel from guests traveling from and to countries in Asia, with, of course, continued COVID-related restrictions and the related restrictions during the year -- the quarter. Intercontinental travel remains on lower levels, but there are some positive signs. We see U.S. market, for instance, exceeding the 2019 levels in December for the first time in a long, long time and China also starting to improve from very low levels, but it is improving month by month. And that is, of course, linked to the -- let's say, release of restrictions in China. So all in all, I think there's definitely more potential for recovery in the market, especially from Asia, even though it eventually will take time for intercontinental traffic to return to '19 levels. In the fourth quarter, Scandic has had an occupancy of 63% in October, 64% in November and 45% in December. Please turn to Page 6. This is market data on average room rates for Sweden, Norway, Finland and Denmark. We have seen a positive trend in room rates ever since the low point in the beginning of 2021, prices have stabilized somewhat during the fall from the very strong summer months, but that's still well above '19 levels in all our markets. Pricing is always a key point for us and we have a strong focus on revenue management to ensure that we can continue to drive prices. Please turn to Page 7. We also know this one. This is market RevPAR, i.e., it's revenues per available room index to the corresponding month in 2019, which we still compare to. All markets show a positive trend compared to '19 where Norway continues to be the strongest market. Finland has picked up since the last quarter, but are still lagging the other markets and this is partly because they are more exposed to the intercontinental travel to and from Asia, which, of course, remains on lower levels as mentioned. If you turn to Page 8, as we also announced last quarter, we opened 2 hotels during the fourth quarter. First one was Scandic Munich Macherei in Germany and we also opened one in Denmark Scandic Opus in Horsens. In total, we opened 10 hotels during the year and adding 2,850 rooms approximately to the portfolio. We also left 1 hotel during the quarter that was Scandic Bygholm Park, also in Horsens in Denmark. We are happy with the timing of all of these openings how the hotels have been received by the market and how we work with the portfolio in general. As you have seen for instance in Horsens, we have moved from an older property to a new property in the same city and with better lease terms and this is just one of recent examples of how we proactively working to improve our portfolio. On the coming slides and pages, if you move to the next one Page 9, you will see pictures and some figures on some of the openings we have done during the year Scandic Munich Macherei, Opus in Horsens, Scandic Norreport and Scandic Orebro Central. If you move to the next page, you'll see more of the openings. Scandic Oceanhamnen in Helsingborg, Scandic Holmenkollen Park in Oslo, Helsinki Hub in Helsinki and in Northern Sweden, Scandic Kiruna. And if you move to the next page, Page 11, when we look then on the pipeline, we have just more than 1,000 rooms, actually 1,061 rooms in our pipeline at the end of the quarter. And of course, as you may notice Scandic Sundsvall Central, which used to be on the list with 210 hotels -- 210 rooms is no longer a part of the pipeline. And actually during the quarter we decided to cancel this project, not something we do very often, but we canceled this project, the main reason was that the contract the company couldn't really fulfill an important part of the agreement and then we still see good opportunities in the market, but for now, there is no contract for Sundsvall. We have also a very clear ambition to add more hotels to our pipeline and we have become a much stronger company now during the last year. We have gradually shifted from, let's say, increasing our focus a bit more to the growth mode again. Of course, we have concentrated on lowering the depth and concentrating on the re-ramp up of the company, but now we shift a bit more into a growth mode. With the 10 new openings during the year, we have a strong offering and we have relatively low committed CapEx going forward for this and next year. With that, please turn to Page 12, and I will hand over Asa, who will take you through our financials.

Okay. Thank you, Jens and good morning, everyone. If you then please turn to Page 13 for our financial, and we'll be starting off with the financials for the quarter. As Jens mentioned we ended a strong year with a stable quarter with both increased net sales and improved results. Net sales increased by 38% to SEK 5.4 billion compared with the fourth quarter last year. We also report an improved result with an adjusted EBITDA of SEK 476 million corresponding to a margin of 9.1%, compared with 11.5% in the fourth quarter last year. But I want to highlight that the fourth quarter last year included close to SEK 115 million in one-off, mainly related to governmental support and compensation related to the agreement with the Norwegian state for quarantine hotels. As we had very low one-offs in this quarter, the adjusted EBITDA margin, excluding one-offs improved to 9.1% in the quarter compared with 7.8% in the fourth quarter last year. All markets contributed with a positive adjusted EBITDA in the quarter, and I'm happy that our continued focus on efficiency and cost control keeps paying off. Lastly, I want to remind you that what I've said on our last call, one-offs are actually tapering off and in Q1, we expect very low one-offs in between like SEK 10 million to SEK 20 million. This is related to housing for refugees in Norway. I also want to remind you that we had one-off in -- of SEK 153 million in the first quarter of 2021. If we then turn to Page 14, we report a strong full year. Net sales increased to SEK 19.2 billion, almost twice as much as what we reported in 2021 and somewhat higher that in 2019, which back then was a record year. Adjusted for one-off of SEK 433 million, we delivered an adjusted EBITDA of SEK 2.1 billion, with the margin of 11.1%, which is slightly above our financial target of 11%. Including one-off, we report a record year with an adjusted EBITDA of SEK 2.5 billion corresponding to a record strong margin of 13.2%. As mentioned earlier, the results were boosted by one-offs, but we should also remind ourselves with a weak start in 2022 due to restrictions in several of our markets. Altogether we are satisfied with the performance in 2022. And then please turn to Page 15. We had a strong free cash flow in the quarter of SEK 945 million, driven by an improved result and the positive change in working capital. For the full year, we reported a strong free cash flow of SEK 2.2 billion, despite the negative SEK 1 billion in cash flow in the first quarter. I want to remind you that free cash flow for the full year was supported by an increase of liabilities related to the variable rent. The net effect was SEK 590 million for the full year and SEK 200 million for the fourth quarter. The operating liabilities regarding the variable rent have continued to increase and amounted to approximately SEK 840 million at the end of the quarter. Approximately SEK 500 million of these will be settled during Q1 2023 and the rest will be settled throughout the year. Then please turn to Page 16. As Jens mentioned, we continue to reduce our debt level and during the quarter, net debt decreased from SEK 2.4 billion to SEK 2 billion. At the end of the year, net debt corresponded to 0.6x adjusted EBITDA and 1.1x, including the convertible bond, which was below our debt ratio at the end of 2019 of 1.7x adjusted EBITDA. Our credit facility amounted to SEK 3.7 billion at the end of 2022 and total available liquidity amounted to SEK 2.8 billion at the end of the quarter. We have the convertible bond with conversion price of SEK 43.36 that matures in October 2024 with the potential dilution of 41.5 million shares. Lastly, we are pleased to announce completed refinancing, which Jens mentioned earlier. The new credit facility of SEK 3.45 billion has been tailored to align with our lower debt level and gives us the headroom needed to execute on our business plan. The new financing matures at the end of 2025 and enables us during certain conditions to finance all or parts of the convertible bond. Please turn to Page 17 then, and here you can see as usual the financial net items and the impact from IFRS 16. Including IFRS 16, the reported financial net was minus SEK 438 million, excluded for IFRS 16, the financial net was minus SEK 55 million. The difference of SEK 383 million is interest expense according to IFRS 16. Noncash convertible interest was SEK 45 million and ultimately, cash financial items amounted to minus SEK 29 million. With that said, a lot of numbers, please turn to Page 19 and I'll hand back to you, Jens, for some final comments.

Thank you very much, Asa. And finally -- and maybe a few comments and on the near term and a few concluding remarks from me. We are cautiously optimistic about the hotel market in 2023, the year has started off, I would say pretty stable and continues with stable booking patterns. So right now, when we look at the current bookings, we expect continued good price development and a stable occupancy level in both this quarter and ahead of us. However, of course, occupancy is still impacted on this, let's say lacking intercontinental. So we are slightly lower than what we saw in Q1 2019 on the occupancy, but with much higher prices. As I also mentioned earlier, the low occupancy level is because of this lagging intercontinental guests, while domestic has been very strong, both in the late part of last year, but also in the beginning of this year and also in intra-Nordic and European traveling are slightly below '19 levels, but has been very stable, I would say throughout this period and even into the new year. There is a recovery potential of course linked to the intercontinental part and we see them picking up slowly but steadily from the '19 levels. All in all, we made a very strong comeback in -- if you look at the comeback we did now in 2022 and I'm, of course, very pleased with the performance in general with an overall strengthening position, I would say, a low debt level -- lower than before and high operational performance we are well positioned for the future. We are monitoring the economic situation on all our markets, and we follow that very closely and we have a high level of readiness to adapt to any changes that might come to us. But right now we see a very stable trend. And with that, I would like to take the opportunity also to thank all Scandic team members for their efforts during the year and all our guests for continuing -- having such a confidence in Scandic. Thank you all, and over to you operator.

[Operator Instructions] Our first question comes from the line of Dashian Adela with Jefferies.

This is Adela Dashian from Jefferies. My first question relates to this quarter specifically. I did notice that your cost base was a bit higher than we had expected and that related especially to raw materials and also personnel costs. How should we think about these 2 items as move into 2023 and just cost base accumulation in general?

No, I think if you look at the cost levels, I think we, if you compare those, I would say we have been quite good at handling, I would say the inflationary cost increases when it comes to the running cost of the food and as you also know we are hedging energy well and we have also adjusted for the pricing on the room rates, which absorbs, let's say, all of these inflationary cost increases. What is impacting the most I would say is, of course, we have opened a lot of hotels, and we have slightly higher guaranteed lease levels in the end of the quarter and we also have that in the beginning of the year. But and we also have energy in more hotels that has an increase in energy cost on that part, but if you look away from that part, I think the rest of the cost levels are very stable. And I think we are actually doing quite well in the commercial area to absorb most of these increases when you compare, let's say, year-on-year with the different months.

Got it. Okay. And then if we could just please get some more color on the industry as a whole, as we progress into '23. I mean, occupancy rates continue to trade and trend in the right direction compared to the pandemic levels, but that we also have the very high RevPAR levels and there are some who expect those to stabilize in '23, if we get some type of control over inflation. So how do you think about this reasoning? And how does that balance out? And what position or initiatives are you then undertaking the position here well, in terms of top line growth for the full year?

First of all, I think you're totally right. I think we are extremely prepared and cautious with any changes in the market now. Now, we all have to remember that filling our hotels is a huge mix of a lot of components and different types of guests and we have a very strong corporate demand right now. We see a very stable mid-week development. Some corporates are continuing to begin extremely stable and that actually drives, I would say the month by month developing a lot right now. We do not see a lower like a deep in the leisure traveling, but, of course, leisure traveling in Q1 is always lower. When we look at the input trends for the summer and the interest for booking vacations, et cetera, it is equally high as what we saw pre-pandemic. So we see no signs of this right now and I must say I've never been through a period so long where everybody is talking about something that might happen and really hasn't affected us directly yet. There's simply one reason for, let's say, the occupancy levels that are slightly lower than '19 and that is linked to the intercontinental traveling that are lacking because mainly, I would say also because of the war in Russia, where Finnair cannot fly over Russia and they have not, they are -- let's say a travel to and from Asia. That is the major reason for that lacking demand. Rest is actually absorbed and continues and I've said that a long, long time now, but it continues very stable. When I look at meeting the situation, meetings are back and I've said that in 3 quarters, meetings are back. Meetings are also back in this year. So it continues to be stable and when I look at meeting booking for the coming period, it looks equally stable as what we saw in the autumn. So there is not right now a signal that people will not travel or they will stop traveling, et cetera, that is not the situation at least so far.

Great. That's very helpful. And then finally just on your strategy going forward. I noticed that the pipeline for new hotels seems very strong. But then we also don't want to forget about the Scandic GO concept and it does seem like the current macroeconomic challenges that type of a concept would work very well in this environment with how the consumer behaves and so on. So if you could please give us an update on your expectations going forward in relation to your strategy?

No, but I think, it seems that the appetite for more hotels in general and to add to the pipeline is much larger now than it maybe was some 6 month ago. We also see that we went through a period last year where building cost globally went up with some approximately 15%, I think and interest rates went up. So of course everybody both lending banks and developers et cetera were a bit cautious on how to create a lot of new properties all over. So that's why you've seen -- you have not seen the same amount of new hotels signings overall in last year. It seems that the appetite for that is growing now. We have definitely on the our side concentrated not to fill. We had 10 openings, as you know. We had a very strong year. We have still ramp up of those hotels, so these hotels did very well last year and we expect them to, of course, perform strongly, also this year. So we are concentrating a lot on securing that they are being received rightly in the market and then we are also having a more, let's say growth mindset or bigger appetite today than we did 6 or 12 months ago, where we have for long concentrated our company on securing that we actually are on a much better position now than ever. I think we, as a company, have been extremely good at handling this crisis. And if you look back, we stand now in a position with lower debt levels and an extreme stable development on the topline and the net results. And that is putting a lot of let's say opportunities on my shoulders where we have, I think, a lot of opportunities both to grow the company and strengthen the company in general. So I'm very pleased with the way we have been forcing on first of all, knowing the debt situation and to stand now with such a low debt is creating a lot of opportunities for us going forward.

And specifically on Scandic GO, is there anything you can say about timings of that?

Yes, we have been -- we haven't announced the exact date yet, but I have been open to the market that we are working on Scandic GO. We spent a fairly good amount of time securing that when we move in with the first hotel, it has to be something that makes a difference. And this is what we're working on right now. So we have been hoping that we will announce the first one before summer and we will open the first hotel, which will be in Sweden. We haven't announced where, but it will be in Sweden and we will open the first one in the autumn this year and I have the date on my table here, so I know exactly which date, we will open. So it is planned for and we will come back with the exact details, but also to give you more flavor on why will this make a difference, that we will keep for a few months more than announcing today. So we will be back, but not that long from now.

[Operator Instructions] Your next question comes from the line of Andre Juillard with Deutsche Bank.

Just a question about cost because you were mentioning that you have been suffering from guaranteed on lease contracts last year. How is it expected to evolve this year? And what is your, even if you are not communicating any guidance for the year, what is your feeling about the profitability evolution for this year mixing these guarantee, which I guess will continue and the operating costs?

Thank you, Andre. I think overall I think for -- it is good that we spend some time on may be explaining a bit about the lease model, because we have, as you know, a very high number of turnover based leases and we only have 12% fixed leases in the portfolio and of course the 12% fixed leases we have impact from the inflationary cost increases on the lease levels of those, on the rest of the portfolio, it's only the guarantee part that is in adjusted with the inflation and that is, of course, if we look at a lower December or lower January then we hit some of these guarantee levels, but we do not hit them when we come during the year. So you will see us perform very solid in the stronger month when we yield up and we get higher RevPAR, but of course, if we have lower occupancy in winter months, these lease levels in percentage will be higher, but for let's say Q2 and Q3, we expect lease levels, in general, to go up with, I don't know, maybe 0.5% or so in that period. So leases is something you need to understand, has a huge difference in the different quarters. When you look at cost levels, in general, I think you mentioned a bit on that Andre as well. I think overall, we do handle most of these. The one that has an impact even though we are hedging energy, we have more hotels and we are also impacted. We are not hedging all of the energy. We have some 90% hedges. So we have slightly increased cost on the energy and that is, of course, something we try to absorb also in the price increases as part of it. Operationally, we maintain our focus to stay even stronger than pre-pandemic levels and that is also part of the reason why you see margins excluding everything last year, including a very weak Q1 actually achieved our targets of these 11.1%. So overall, that's why we are still, let's say, relaxed and confidence about how we operate the company because we have such a strong control of the cost levels, I think, in general. Then you had a comment finally on the outlook for the full year and, of course, we will not give you an estimate, but the best thing I can say is, I look at the year, which looks very stable and I think we will continue to see that we will adjust prices ongoing to absorb inflationary cost increases. So we will do that as possibly as we can. I expect a year, which seems to be very stable on corporate traveling and on meetings in general. I think the summer still will be good when it comes to leisure. We might see a few local weekends et cetera that eventually should be hit -- it should be. If you think about the economy, but we haven't seen it yet. So we have not seen a drop in that, it might come, but we haven't seen that yet. So all in all, I look at a year which is very stable year for Scandic and I expect also both very solid positive cash conversion and a positive EBITDA on normal numbers that you all can relate.

Does that mean that you expect to have more or less stable margin compared to last year, meaning that the operating leverage will compensate the one-offs you had at the beginning of last year?

We will not be able to, we had SEK 433 million in one-off effects and we cannot expect that we can compensate for those one-off effects because they were related also to the history. So some of the governmental support came in after you can say even related to the year before. So we cannot, but if you look away from those, we look at a SEK 2.1 billion EBITDA result during 2022 and of course we, that is the number you need to look at and target as against with these different ups and downs linked to it. So we need to look away from all these one-offs and I am looking so much forward to have a more normalized let's say long period and where we can trade without these one-off effects because this morning, you can say you all have also seen the result, and it is actually very, very strong. We delivered almost SEK 480 million in the quarter on the adjusted EBITDA and we compare with the year before, where we have much more one-off, you could actually say we had like in that quarter in '21, we had almost a difference of SEK 255 million in total one-off effects because we had the reported SEK 150 million plus, actually, a lot of these discounts. So if you look into this, the result is actually much stronger than what you have maybe seen this morning. But, so like for like it is a very solid result and you should compare all of this excluding these one-offs, then eventually we get what we deserve.

[Operator Instructions] There are no more questions at this time. I would like to turn the conference back over to Jens Mathiesen for any closing remarks. Jens?

Thank you very much, operator, and thank you all for dialing in and listening in. Thank you for following this result as well. And I hope you as us gets a very good year. So I wish you a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.