© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, everyone. My name is Joe, and I'll be your conference operator. Welcome to Hoteles City Express' First Quarter 2023 Earnings Conference Call. [Operator Instructions] I will now turn the call over to Hector Vazquez, the company's Investor Relations Director. Please go ahead.
Thank you, and good morning, everybody. We released our first quarter 2023 results yesterday after the market, which can be viewed from Hoteles City Investor Relations website. We want to remind you that during this call, management comments may include forward-looking statements. We ask that you please refer to the legal disclaimer in the quarterly guidance on this matter. Joining us on today's call is Mr. Luis Barrios, our CEO; and Mr. Santiago Gutierrez, the company's CFO. We will begin with some opening remarks followed by Santiago, who will present the company's financial results. We will then open the floor for questions. Now it's my pleasure to turn the call over to Luis.
Thank you, Hector. Good morning, everyone, and thank you for joining us today to present Hoteles City Express first quarter 2023 results. We started off the year with a strong performance supported by solid fundamentals and a better outlook for the industry and the company. Occupancy rates were 53.3% for the quarter, 8 percentage points above first quarter of 2022. The average daily rate was MXN 1,198 for the quarter, up 12.6% compared to the same quarter of last year. These results highlight the strong demand and the positive trend of our range of diverse hotels. While the Mexican economy continues to grow and is benefiting from current nearshoring investment trends, we faced macroeconomic challenges in the quarter due to rising inflation and interest rates. Nevertheless we managed to increase occupancy and raise our ADR by leveraging our diverse hotel offerings and attracting the broad customer mix from business travelers in industrial and urban corridors to tourist and resort destinations and colonial cities. We are especially optimistic about the revival of the manufacturing sector, particularly the automotive industry, which has spread to the Bajio region and Mexico's north and show signs of recovery. During the quarter, we were notified of the approval from Mexico's Antitrust Commission, COFECE, to proceed with the strategic relationship with Marriott, which includes the sale of our 5 brands. We currently -- we're currently working on finalizing and signing new franchise agreements and expect it to close in the beginning of May. In the meantime, we continue to work on our operational integration with Marriott International. As we have mentioned before, we anticipate that our new strategic relationship with Marriott will lead to multiple benefits for our chain. By partnering with such a renowned company and brand, we expect to increase our market share, especially among international travelers and improve still further our operational efficiency. This alliance will also generate significant cost synergy contributing to an estimated 150 to 200 basis points of our EBITDA margin. Ultimately the partnership will pave the way for easier expansion beyond Mexico, especially in the U.S. and around the Caribbean and LatAm, allowing us to capitalize on new growth opportunities supported by Marriott. Looking to the regions, our portfolio continues to be well diversified and resilient with increased business travel picking up in areas that had previously been lagging. Notably, hotels located in the southeastern region of the country stood out in the first quarter with an occupancy rate over 62% versus 56% previous year, driven mainly by the recovery in demand for events, conventions and business and leisure travel. In addition, the northwest region continued to perform well due to increased nearshoring activity in the border industrial zone and the growing demand for medical tourism, boosting demand in 14 cities and 30 of the chain hotels for the third consecutive year. Metropolitan areas continue to show significant recovery in the first quarter as large corporations resumed in-person travel and events and thus an increase in the road traffic. In particular, we saw a significant improvement in the City Express Plus brand performance. The brands, higher room rates and consistent RevPAR performance contributed to the company's overall growth in revenues. In the Bajio region, companies such as BMW, GM and Drexel have recently announced large new investments. We anticipate 25 of our hotels in the area to benefit directly from these, which should improve occupancy and rates going forward and over time, allow for construction of new hotels and further growth opportunities. As part of our strategy to further increase demand, we have focused marketing efforts to position City Express Plus as a cash load luxury brand. In this effort, we have expanded our marketing channels in the digital, print and cinema space in addition to implementing strategies to reach new corporate clients. Regarding financial performance, EBITDA for the quarter was $264 million, an increase of 19.6% compared to the first quarter of 2022. The EBITDA margin was 31.6%, which represented an expansion of 920 basis points. These results reflects our continued efforts to increase rates and reducing cost through operational efficiencies, process automation and the benefits of scale as fixed costs get diluted by growth. We continue our efforts to sell land and reduce our debt balance. During the first quarter, we recycled land bank for nearly MXN 70 million and made debt repayments of more than $60 million. Also we have -- as we have mentioned before, once the transaction with Marriott is closed, we plan to make a debt repayment of somewhere between MXN 800 million and MXN 1 billion. This will significantly delever the company and derisk it at the same time, which will not only free up cash flow for high returns for shareholders, but also provide us with financial flexibility to pursue other growth opportunities. Additionally, we're already in the path to refinance our syndicated loan, which will allow us to improve amortization schedule to reduce interest rates and take advantage of more favorable financial terms. We expect to conclude this refinancing during the second quarter of the year. All in all, our efforts of deleveraging our balance sheet translated into a reduction of the net debt-to-EBITDA ratio, which fell from 4.2x in the quarter, down -- I mean, yes, 4.2x in the quarter, down from 8x a year ago. Considering the industry trends and current market conditions as well as the benefit of our partnership with Marriott, we expect to close the year with a net debt ratio of around 3.3x. At the same time, we will continue with our share repurchase strategy. With respect to CapEx, in February, we opened 2 new hotels, the City Express Plus Guadalajara Providencia with 150 rooms and the City Express Plus Mazatlan, a franchise and managed hotel, with 130 rooms. It is worth mentioning that quarter-on-quarter, we reduced our nonproductive asset figures in 19%, down to MXN 1.2 billion through the sale of land and completion of a couple of hotels that required a minor investment. Going forward, we will continue to reduce some nonproductive assets. Additionally, this quarter, after conducting a thorough analysis, we have acquired the remaining 30% of the City Express shares and City Express Suites in Playa del Carmen and 50% share of the City Express and City Express Junior Puebla Angelopolis hotels for a total of MXN 88 million. These hotels still have a potential for improvement and our partnership with Marriott will benefit demand in all 4 hotels. Overall, our focus remains on identifying portfolio properties that can improve our profitability and performance, and we continue to analyze each hotel and location individually to find such opportunities. We estimate these strategies could add an additional 50 basis points to our EBITDA margin by the end of 2023. Overall, the first quarter marked a productive start to the year and further proof that Hoteles City Express is in a strong position to create shareholder value with its high-quality hotel portfolio and diverse customer mix, together with deleveraging and increasing productivity. Our chain strong culture and empowered employees have played a crucial role in enabling us to adapt our services and operations to ever-evolving market demands. This adaptability is further bolstered by our strategic leveraging of technology, ensuring that Hoteles City remains competitive and at the forefront of the hospitality industry in our region. Before I pass the call to Santiago, I would like to reiterate that Hoteles City Express has become the largest integrated company with presence in Mexico and LatAm, in our market segments with more than 4 million customers annually. By integrated, we mean the ownership of brands, hotel management capabilities, investor in hotel assets, design of hotel concepts, project manager of hotel developments as well as owner and developer of technology for the lodging industry. After closing the transaction and establishing the strategic relationship with Marriott, we will receive all the brand services from them and the opportunity to grow internationally in other market segments. We will remain with our current investment in hotel and be able to expand our management contracts and development services as well as information technology platform in the lodging sector. I will now pass the call to Santiago, who will give you more details on the results of the first quarter.
Thank you, Luis, and good morning, everyone. It's my pleasure to share with you our results from the first quarter of 2023. I'd like to start by highlighting a few important strategic balance sheet-related actions taken during the quarter. First, as Luis mentioned, we made a debt prepayment of MXN 50 million, which reduced our net debt and improved our net debt to EBITDA ratio. Additionally, we have started the process to refinance our syndicated loan, which is scheduled to be done during the second quarter of 2023, to improve amortization schedule and interest rates. We expect this refinancing to provide us with more favorable debt terms, further strengthening our balance sheet. Furthermore, once the transaction with Marriott is completed, we plan to make a debt repayment of between MXN 800 million to MXN 1 billion. Overall, these actions will enable us to further enhance our long-term growth strategy, improve our financial position and create value for shareholders. Looking to the quarterly results, my remarks will be based on Hoteles City Express' first quarter 2023 financial results as prepared under IFRS guidelines. We closed the quarter with a portfolio of 152 total hotels, which is 1 less hotel compared to the same quarter of the previous year. Of these, 145 were considered established properties, 2 more than the first quarter of 2022. The chain operated 17,487 rooms in the quarter, 156 more than the first quarter of 2022. At chain level, our ADR increased 12.6% year-over-year to MXN 1,198 and the occupancy rate increased 8 percentage points over the same period to reach 53.3%. Taken together, RevPAR increased 32.8% year-on-year, closing the quarter at MXN 639. Strong business and leisure hotel activity, along with increased rates and consistent demand led to an increase in the chain's RevPAR. We believe this improvement in rates will continue into the second half of 2023. Revenues reached MXN 850.3 million for the quarter. This implies a 34.6 year-on-year increase and reflects the continued positive trend in recovery of occupancy and rate levels with which the company expects to uphold this growth. Total costs for the quarter increased 10.7% year-on-year to MXN 678.5 million, mainly due to the increase in occupancy and therefore, higher costs for occupied room per night. Despite these factors, the increase was 23.9 percentage points lower than the increase in revenue due to our cost containment strategy, which shows our high operating leverage. First quarter adjusted EBITDA was MXN 265.7 million, an increase of 91.6% year-on-year with a margin of 31.6% and a 9.4 percentage points higher than the growth in adjusted EBITDA reported in the first quarter of 2022. I'd like to stress that this is the highest EBITDA amount for our first quarter in the history of the company and the margin is the highest in the first quarter since 2019. Our comprehensive financing result increased for the quarter to MXN 200.7 million compared to MXN 124.9 million reported in fourth quarter '21. This was primarily due to higher interest payments under bank obligations brought by interest rate increases. At the end of the quarter, 63.7% of our total debt was covered with a derivative instrument, capping the base rate of our loans to a weighted average cost of 12.6%. As a result, MXN 3,384 million of our debt is hedged against interest rate increases. At the end of last year, we were able to agree with our bank vendors to authorize financial covenant waivers until the fourth quarter of 2023, which shows the confident and strong relationship we have with our banks. Financial liabilities decreased 6.3% from MXN 5,669.8 million at the end of third quarter '22 to MXN 5,309.9 million in first quarter '23. As Luis mentioned, we acquired approximately $60 million worth of shares in the first quarter. We currently hold approximately MXN 138 million in shares of the company, equivalent to 24 million shares. This share buyback program should increase earnings per share and create further value for our shareholders. We plan to cancel 144 million shares that were previously issued, but are currently in the treasury and will not be pledged. We will continue to consider further share repurchases if we believe it is in the best interest of our shareholders. Cash and cash equivalents decreased 27% year-over-year to MXN 735.2 million. We acquired approximately MXN 16 million as part of our share repurchase plan in the first quarter of 2023. We prepaid debt for more than MXN 60 million and bought minority interest for MXN 88 million. Net debt increased 2.1% versus fourth quarter 2022 to MXN 4,575 million. In summary, we are pleased with the results from the first quarter of the year, and we undertook significant strategic actions to strengthen our balance sheet. Coupled with the anticipated COFECE approval, which brings us closer to finalizing the transaction with Marriott, this quarter has been highly productive in terms of ensuring long-term value for our shareholders. Thank you for your attention. Joe, please begin the Q&A portion of the call.
[Operator Instructions] The first question comes from the telephone number ending in 4579. [Operator Instructions]
Congrats on the results. I have some questions. The first one is, Luis, you just mentioned about the possibility of exploring future growth opportunities upon the strengthening of your capital structure. So my question would be, is there any region or format that you will be actively or more actively taking this into the bill? And then a second question would be on the opportunity for improving over 50 basis points on your EBITDA margin that you mention on your press. So I was wondering where should these efficiencies come from?
Okay. I'm sorry, I didn't hear your name.
I'm sorry, my apologies. This is Valentin Mendoza from Actinver.
Okay. Thank you, Valentin. Well, the opportunities wise, we still have a land bank of about MXN 650 million, which are -- most of them are really nice business of properties spread out in the strategic regions of the country. So that is one way to keep on optimizing our balance sheet and reducing unproductive assets would be to detonate those developments and use our land value. The other is something that we have been doing is probably we can partner with some other investors in doing those developments or you just -- we could just sell the land together with a project mounted on and invested and being invested by third parties. So the initial -- the initial strategy is to try to deploy and use our land bank to detonate growth in the strategic areas of the country where we are located. Now in terms of the additional -- the margin, remember, the margin, City Express, I don't know whether that answers your initial question.
Yes, actually, you did.
Okay. Now the second one is the following. Remember that there were some -- City Express and the whole industry has cycles even within the year. So the first quarter is slow for the business sector and probably high for the leisure especially in the international markets. And then you have different behaviors during the year. The GOP margin that was presented by Santiago is for the first quarter, which is cyclical. So that is not the aim or the final GOP margin or EBITDA margin that we're aiming for the remaining of the year just to separate the answer. So in essence, what we have been doing is based on the expansion and the growth in sales, you've seen how our GOP growth, our profit margin grew from year-to-year and the volume with a 30-something percent increase in sales, we showed up a 9% increase in operating profit, so on the EBITDA. So what will happen is that when we are saying that 0.5 point and 1 point additional, is that we still have some areas of the country, which have not returned to normal circumstances. So we are aiming for that. We are also, as many other industries and the hotel sector is not separated from that is that we have been having a scarcity in labor, qualified labor. There is a lack of personnel in many areas of the country that prevails or forbid you to open completely your companies because you will probably not be giving or providing an excellent service. So what we are really doing is analyzing a bunch of properties that are located in those areas, which have these kind of difficulties. And we are -- have putting them in, let's say, what we call intensive care. It is a mode of operation, which is having close contact to our operators in the region, trying to get the staff up to the speed as well as trying to identify market opportunities. So that when we see that we can get some efficiencies out of that program, and we foresee somewhere between 0.5 point and 1 point additional in profit throughout the year is not necessarily for this quarter for the remaining of the year and take into account that the 32% margin that we have today is not necessarily the highest during the year. We have normally the second and third -- second and fourth quarter are very strong, and the margin should be overall in the year above that, above the number that we're showing for the first quarter.
In addition, I would like to add, Valentin, to your first question in terms of future growth internationally. Marriott will be doing a lot of effort into expanding the brand internationally with third parties. And City Express will be in terms of the strategic relationship will be close to Marriott and doing development and management for those projects. So I mean, we will be an option for new owners that invest in the City Express by Marriott brand in order to operate them and develop them. So that also is a new growing for the company.
And just one final question, if I may, from my side. You highlighted that over -- if I got it right, I'm sorry, the 3 properties are currently capitalizing on the nearshoring tailwind. So I was wondering if you could provide us with some color on the frequency that assets are currently delivering?
So just to get the question, you're asking for the portfolio in the nearshoring area or I didn't get it?
If I got it right from your press, 3 hotels are located in the northern region and are currently seeing the tailwind from nearshoring. So my question is, if you could give us some color on the frequency those assets are having as we speak? You probably know that for the quarter.
Yes. In terms of our -- like we have the company divided by regions and the northeast region has around 50%, 57% occupancy and northwest has around 60% occupancy. This, of course, have one of the highest average daily rates through the company because they're close to the border and a lot of people know it's index to dollar. So we're doing pretty well in these corridors. And just to mention, I mean, the nearshoring is something -- it's like a trend right now, but the company started investing in these corridors, averages, it was founded in 2002. So basically, back then, the quarter that was targeted was the NAFTA going from Mexico City all the way to Nuevo Laredo and Laredo in Mexico. And that's where we started growing, and then we identified the path that goes all the way to Nogales and Tijuana, that border the Pacific than the oil industry, then the Bajio. So I mean, it's something that it's happening right now, but the company has been targeted and positioned to fulfill all these trends back since its foundation.
Yes. No, and some other things, Valentin, when you say nearshoring, for us it got a new -- something that was one with NAFTA. Everybody -- I mean, we knew that was going to happen. We have seen drawbacks in that in the sense that when China appeared, many of those corridors in Mexico flew to -- the industries there flew to China and then they're coming back. But nearshoring is not only the border towns. You can use Silao in Guanajuato, which is in the center of the country as part of the nearshoring. They have a lot of communication, tracked highways and rail tracks all around, and they even have a free trade song embedded in Silao, which is a free tax. So the investment nearshoring is not necessarily in the border towns. You'll find it in the ports, you'll find it in certain cities within Mexico. Tesla is moving into Monterrey. So when you say nearshoring, yes, nearshoring, I would say, represent -- even in Progreso, Merida, receiving a lot of investments. So when you think of nearshoring, it really is the country. And I would say is center north, unfortunately, not necessarily the southern part of Mexico unless Tapachula and Salina Cruz are detonated with a train and with the infrastructure in the ports down south. I just wanted to make a remark that what means nearshoring to City Express.
Our next question comes from Michael Birkel. [Operator Instructions].
Yes. It's actually Bernd Mühlfriedel, but it's the same company, Zenon Investments from Germany. First of all, congrats to you to the excellent results. It's really very encouraging to see how you came out of this hole from the COVID. I've got a question to the balance sheet and the income, the bottom line profitability. Nice to hear that you are deleveraging and even further so in Q2, the interest expense should go down then again. So my question is, first, when do you see a return to bottom line profitability? And maybe can you share some bottom line profitability targets you have in mind for the whole year, if that's possible?
Well, the deleveraging should start, we are expected to see that deleveraging in the next month with the closing of the transaction and that would automatically return us to profitability. If you see the losses during the year-to-date and compare it to the interest expense that we are having you'll find that it's really what's making us unprofitable or having losses. It's not the operating profit because at operating profit, we are positive in terms of results. It's really the cost of debt. So we are concentrating on eliminating that at the rate -- current rate of uncovered with the interest rate caps. The average rate is 14.5% of cost. So if you take 800 -- let's say, $1,000 million, they don't make the math easier and apply MXN 140 million, 14%, 14.5%, is roughly MXN 145 million of interest a year. So if you were to add that back or we do the interest expense for the equivalent for these 3 months, you'll find that the company is in profit already. So we should -- there is not an operating problem. It's really a financial problem. And the true of the fact is that this about MXN 1,000 is the cash flow outflows that we had during the pandemia times. So the over leverage of the company was really caused by the losses that we incurred during the pandemic. And not only losses, we continue to serve debt and pay principal and delever during the pandemia and we even invested during the pandemia. MXN 400 million were invested in real estate in order to close the properties that were under construction, and we can save them something that we did. And then another MXN 350 million were used to redo that and MXN 600 -- close to MXN 600 million to pay interest during the pandemia. So, if you have that, and only MXN 100 million were lost in EBITDA. So really, what we are doing with payment of that is really patching the hole that was created by COVID. So if it weren't for that, we would be profitable already in the bottom line. So where do I expect? I don't know whether we can say it or not. We typically don't give evidence guidance. But you can work with our -- with Hector Vazquez and our Investor Relations area to review your model and try to be -- give you some light.
But what we can share -- this is Santiago, Michael. And what we can share now and reiterate is that we expect 200 basis points improvement in EBITDA margins because of the synergies with the Marriott transaction and another 50 basis points for what Luis mentioned in the question before, all these we will have and will be improving during the remainder of the year.
Yes, as well as during the restructuring, we will reduce our average cost of debt.
Correct.
Since the terms of the restructuring reduces the spread that we're paying for the COVID loan, for the [indiscernible] loan. So you'll find a lot of savings in that line, which charge us -- we're working for the banks, and we are not hired for that. So now we have to work for investors. So, you'll find that there is an important reduction in the nonoperational expenses like industry.
Our next question comes from the telephone line ending in 2836. [Operator Instructions]. It looks like the phone line question is no longer coming through. As a reminder, Hoteles City's CEO, Mr. Luis Barrios; and CFO, Mr. Santiago Gutierrez are available to answer any further questions you may have about the first quarter 2023 results. [Operator Instructions] We have not received any further questions at this point. So that concludes our question-and-answer session. I would now like to hand the call back over to Mr. Luis Barrios for closing remarks.
Thank you all for participating in today's call. We are pleased with the robust performance in the first quarter and anticipate a strong remainder of the year. As always, we appreciate your trust as we work to generate value for our stakeholders. Should you have any questions or feedback, please don't hesitate to get in touch. We're more than happy to speak with you.
That concludes today's call. You may now disconnect.