Redefining the Timeshare Market in Spain

Transcription

1 Conference Transcription Date of conference : 29 July 2010 Conference title : Sol Melia Sol Melia First Semester 2010 Results

2 CONFERENCE DETAILS Conference Date: 29 July 2010 Conference Time: 18:00 CET Conference Duration: Approximately 36 minutes Chairperson: Carlos Lopez Garcia Speakers: Transcript of ACT conference on 29 July 2010 Page 2

3 KEY: words in bold Unsure if words heard correctly - please check?? Words could not be distinguished (Inaudible -.) Words that are entirely inaudible for the specified reason ACT Operator Good day, ladies and gentlemen and thank you for standing by. Welcome to the Sol Melia First Semester 2010 Results Conference Call. During today s presentation, all participants will be in a listen-only mode. Following the presentation the conference will be opened for questions. If you have a question, please press *1 on your touchtone phone. If you would like to withdraw your question, press *2 and if you are using speaker equipment today, please lift the handset before making your selection. As a reminder this conference is being recorded today, 29 July I would now like to turn the conference over to our host, Carlos Lopez Garcia, Vice President of Investor Relations, Department of Sol Melia. Please go ahead, sir. Carlos Lopez Garcia Thanks, operator. Good evening everybody. We are releasing the first half results which verify that the positive underlying trend witnessed during the early months of the year has continued in the second quarter leading the company to report the first quarterly hotel EBITDA growth after nine consecutive quarters of decline. We will elaborate on that later on throughout this conference call in which apart from giving you an overview of the semester results we will also give an update, on the trading environment and what you should expect going forward as far as the business is concerned; also, a summary of the financial situation of the company. In order to do so, we are here with Andre Gerondeau, Executive Vice President of Hotels, Luis del Olmo, Executive Vice President of Marketing and Onofre Servera, Executive Vice President, Group Finance. For any specific details, breakdown or data you may require, the investor relations team will be available as always following this conference call. Going into the semester results, total consolidation revenues and EBITDA have gone up by 6.6% and 13% respectively. Net profit stands at 13.5 million versus the 1.2 million of one year ago. These figures are pretty much in line with the market consensus. Regarding hotels, as we have already mentioned, the company is reporting today its first quarterly EBITDA increased since Q We think this is a merit taking into consideration the negative effect of the eruption of the volcano in Iceland in April and May and the closure of air space in some countries in Europe which led to an increase in cancellations and no shows for groups coming from Northern Europe. Mainly affected are our resorts in Spain although the impact was partially offset by the increase in occupancy in some city hotels. Net net, the volcanic ash cloud has had a negative impact of around 1.8 million of EBITDA in our account. Looking at the figures for the semester, RevPAR has gone up by 6%, explained by a 4.2% increase in occupancy and 1% increase in average room rate. This pricing evolution is very interesting and it s something of which we are very proud especially in light of the high level of price resistance that we had at the beginning of the year in the Caribbean, due to the devaluation of the currency in Venezuela this is still going on - but also so far as in Mexico last year and the earthquake in Haiti with its impact in our properties in the Dominican Republic. This was offset, this pricing pressure was offset by the performance in Europe and the company pricing strategy which focused on adding value through clear value for money propositions as opposed to simply discount rates. Again in the semester, cost per stay went down by 0.6% which has led to an EBITDA Transcript of ACT conference on 29 July 2010 Page 3

4 increase by 6.6% and EBITDA margin improvement of 38 basis points. When you strip out the latest hotel incorporations mainly through lease agreements currently mature in the market, EBITDA margin improved by 133 basis points and EBITDA figure improved by 10.9%. This is the semester figures. When it comes to the second quarter alone, RevPAR has gone up by 11.9% compared to a minus 0.5% in Q1. This positive RevPAR evolution is explained by both average price which increased by 5.9% once the impact of some of the extraordinary effect that hampered the consolidated average prices reduced such as the impact of the earthquake on the Dominican Republic and that consolidates the trend to a recovery. Occupancy in Q2 has increased by 5.7%, 5.9% in ARR, 5.7% in occupancy. Cost per stay increased by only 3% which has led to an EBITDA increase by 15.5% and an EBITDA margin improvement of 80 basis points. If we strip out the latest hotel incorporations, again EBITDA margin improves by 245 basis points while the EBITDA figure improved by 25%. We are also happy to report that the year-to-date overall guest satisfaction in our hotels and resorts has improved across the board. Surveys indicate that perceived quality levels have gone up to 80.7% compared to 79.7% achieved over the same period last year. In terms of Sol Melia s RevPAR evolution, we are not going to go through every single brand given that quite in detail in the report we sent you a little while ago. Very briefly, let us give you an overview of the results by geographical region. In Latin American and the Caribbean, RevPAR in the second quarter increased by 5% mainly due to the recovery of occupancy in Mexico which are running at 64% - a 49% increase versus last year when we saw the severe impact of the Influenza outbreak. In terms of prices in Cancun, although they have recovered in the last two months, they are still 29% below 2008 levels, two years ago. The results are good in the Dominican Republic where as I mentioned the situation is more or less back to normality following the earthquake in Haiti. The trend in the North American and Latin American feeder markets basically explains the recovery in occupancy in Latin America. In the Spanish resorts, RevPAR in the second quarter increased by only 0.3% explained by the volcanic ash cloud we mentioned before and it s a significant impact on the resorts. On the other hand, it is also worth mentioning the specially positive performance of the Canary Islands and the better evolution of the Melia in premium brands versus the Sol hotels. We will cover that later on with our outlook for Q3. In relation to the European cities excluding Spain, RevPAR has increased by 14.7% which is pretty much an improvement on the positive trend. We already saw in the first quarter widely explained by Germany, the properties in Paris and the Melia White House Hotel in London. In the Spanish cities, we are very satisfied to announce a 15.3% RevPAR increase confirming the trend that we advanced for the month of March. This is explained mainly by the evolution of Madrid and Barcelona. In terms of segmentation, what lies behind this growth is the performance that we have seen in both business groups and individual leisure travellers. The business groups have increased by 65% in the quarter while leisure travellers have increased by 20%. These are the segments that we already advanced that we could do better at. Regarding business groups, the overall performance of the Spanish cities is explained on the back of the meeting facilities we have in the Melia branded hotels. Actually this is the brand that is showing a better performance in terms of RevPAR plus 18% versus plus 9% in Tryp. Not only that regarding the evolution of business groups but also the efforts of the company to capture the niche business, the work that we have done with our key and corporate accounts and the reinforcement of international sales efforts in meetings, incentives, conferences and events. These are all factors behind the positive evolution. Transcript of ACT conference on 29 July 2010 Page 4

5 In relation to the individual leisure travellers, the trend is explained by the implementation of customer relationship management tools with a solid performance in terms of the number of personalised campaigns focused on our distribution channel especially solmelia.com together with a sales strategy focused on city breaks especially in cities like Madrid, Barcelona and Seville. We are very happy to also verify that although it is modest, a 1% revenue improvement have taken place in the individual business travel in Q2. This is mainly explained by our key accounts. These are customers with whom we have a more direct and loyal relationship rather than the transient business which is still under pressure. In the company segmentation, the key accounts and corporate accounts represent some 50% of revenues while the remainder is explained by this aforementioned transient business. Still in the Spanish city evolution the presidency of the European Union by Spain has not had really the expected impact on our hotels, scarcely 1 million in revenues. That s only 0.7% of the total with the good news being that it cannot be said that any extraordinary events are behind these figures in the Spanish cities, so a good overall performance here. We are very happy to verify that the work done over the last 24 months already within the framework of the contingency plan on both revenues and costs is now really paying off. Within the Sol Melia Vacation Club, our timeshare business unit, the overall performance during the semester has been below expectations mainly explained by three main factors really: the decrease in occupancy level in our resort in the Dominican Republic during the first quarter affected by the earthquakes in Haiti; also a significant change in some hotels in the customer mix with the number of transient guests decreasing and an increase in the number of groups. These groups are not typically qualified prospects and in many cases do not include other family members which makes the purchase of a vacation club product far less likely. Additionally in 2009, we started to implement actions to reduce delinquency that involves the increase of minimum qualifications for prospective buyers, focus an incentives to the sales force for higher average downpayments as well as payments in cash, reducing the number of units sold that are actually financed. We just want to finish the summary of the P&L account by pointing out a few positive things on the figures. First, 33.5 million of benefits derived from the disposal of the TRYP brand included within the framework of the strategic alliance signed with the Wyndham Group in early July. It is also noteworthy the improvement of the financial results by 7.3% explained by the capital gains generated from two minority stakes which offset a negative inflationary effect, the accounting of the convertible bond and the slight increase in the company s average interest rate finally due to the interest rates swap signed last year in order to increase the weighting of fixed debt currently 56% of the total versus 44% floating. Average interest rate for the company in the semester stands at 4.1%. Regarding the financials, the first thing that we would like to point out is that Sol Melia has been able to meet its bank covenants, net debt EBITDA and EBITDA to net interest that currently involve 492 million and the company also remains confident that it will accomplish it s covenant goals in Net debt has increased by 13.5 million versus December When comparing June to June, however it decreased by 181 million. Final figure goes down to 874 million. Additionally Sol Melia has been able to maintain its financial liquidity strength. The company has increased the credit facilities available by 5.4% versus December 2009, up to 233 million representing total 23 credit facilities and it has also signed three new bank loans for 16 million during the semester. Additionally they have sold assets for 68 million together with limited CapEx. That has led the company to maintain high levels of liquidity which has risen in the semester to 542 million, guarantying short to medium term debt repayments. This is 136 million in the second half 2010 of which we have already paid 80 million already in July and 247 million in Transcript of ACT conference on 29 July 2010 Page 5

6 We advance also that Sol Melia is currently working on refinancing a significant portion of its short and medium term maturities with the aim of smoothing it s debt maturities schedule, extending the average maturity period of its debt. This conservative approach on the financials and the anticipation in financing, the debt commitments, enable us to achieve a higher level of comfort. That was pretty much regarding the financials. Regarding Sol Melia outlook for the remainder of the year, we are cautious on the vacation club business taking into consideration that so far it is not evolving as expected and a recovery is not expected before year-end. When it comes to hotels, the outlook for the year is defined by the performance of the third quarter coinciding with summer season. For the hotels ambition, the third quarter represents some 40% of its annual EBITDA even though there is a trend to more last minute bookings which lessens the visibility of the company. We still have good expectations for the third quarter where we expect to meet our budget in July and August being clearly ahead of last year. Looking at the overall company s outlook by geographical areas, for the Spanish resorts, the expectation should be analysed within the framework of the persistent resistance of the UK and Germany markets towards Spain. Nevertheless the strengthening of our positioning with intermediaries and key partners in these markets enable us to report an increase in both markets combined with an overall growth with our key partners in Spain which point towards an overall improvement for the summer season. In the Spanish cities, it is evident that the reservations we already have in the business group segment indicate a recovery in this segment and point towards a foreseeable improvement in full service properties typically in Melia hotels. Overall booking position for the next three months indicate a need for some brands to positive evolution in bookings with no deterioration in price. Going farther into the year, we do not have that much visibility and so retain a cautious stance on the Spanish transient business. In the European cities, Sol Melia trend is really positive as showing the evolution of our hotels in Germany, Paris and London. In Latin America and the Caribbean, we understand that the evolution is linked with the US and Latin America, both of them origins for our customers. Figures for July are positive and we do not expect major changes once the situation in the Dominican Republic returns to normality. All in all although we are maintaining a certain degree of cautiousness regarding the Spanish consumption, we have somewhat changed our tone on the 2010 RevPAR evolution. We are more confident now about the year-on-year improvement not only explained by occupancies but also in average prices. This is a highlight for us and that underpins company s price and strategy pointing to a more clear recovery of Sol Melia s underlying hotel business and point to a positive evolution of Sol Melia s consolidated performance. On my behalf that s pretty much it. We hope that we have been able to explain the situation to your satisfaction now. We are happy to respond to any questions you might have. We remind you that we are here with Onofre Servera, EVP Group Finance, Andre Gerondeau, EVP Hotels and Luis del Olmo, EVP Marketing. Operator, please. ACT Operator Thank you, sir. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you have a question, please press *1 on your touchtone phone. If you would like to withdraw your question, press *2 and if you are using speaker equipment today, you will need to lift your handset before making your selection. One moment please for our first question. Once again, ladies and gentlemen, if there are any questions at this time, please press *1 on your touchtone phone. And our first question comes from the line of Tran Dang with BNP Paribas. Please go ahead. Transcript of ACT conference on 29 July 2010 Page 6

7 Yes, hello. I had a question on your decision of smoothing the debt payment schedule. What are the options that you are currently considering and what is the timeframe of your refinancing? Carlos Lopez Garcia Regarding our schedule as far as debt maturity is concerned, as I mentioned, we have 136 million in H2 of which 80 million have been already paid. In 2011 there are 247 million while 275 million in 2012 of which 107 million represent the preference share issue. Regarding the time frame, we want to refinance the maturity. It is something that you should expect either before or after the summer. We hope nevertheless that we can close the deal in a few days. And regarding the options of financing, what we are trying to do is to refinance part of the syndicated loans that mature in 2011, probably We want to extend the maturities of this kind of debt. Regarding the option, we have been looking at the financial window that could represent the best option for us. One of the possibilities would be to refinance the syndicated loan with a singular kind of facility. This is all I can say at the moment. OK. Do you have as an option like the capital markets, something like a convert that you did? No. (Inaudible several talking at once) No, it would a kind of we are not thinking about convertible bond. Obviously, we are not thinking about capital increase, no question whatsoever. We are talking about pure debt and as I mentioned the most likely scenario is the one where we refinance the syndicated loans with a very similar kind of facilities. OK, great. So it s no capital market debts. OK. In terms of you EBITDA for your first half, in terms of the capital gains and the one of, if I am correct you have like the TRYP payment which is 33.5 million and you also have, in Q1 you had like 5.5 from the hotel in Cordoba and then, is there is anything else that is included in your EBITDA? No, nothing else. No. OK, and about the 33.5 million, does it come through your revenues, or directly in your EBITDA? This is net revenues in both cases. Transcript of ACT conference on 29 July 2010 Page 7

8 So, it s in net revenues in both cases so it means that in your 581 million of revenues, it includes the 33.5 million from the TRYP transaction? That is correct. OK, great and finally, just in terms of your outlook for the third quarter, on the resort side, what you are telling is that basically you do not see much pick up, is that right, like for the summer season? No, we have not said that. What we are pointing out regarding Q3 is that it s pretty much the other way around. First we want to clarify the level of resistance that we find in some markets. This will be the UK coming to Spain. But by the same token, we want to stress that the job that we have done with key partners and intermediaries and large tour operators for the last two years, we are clearly ahead of the market. Being ahead of the market represent also an increase over the 2009 figures versus the summer season We expect an increase in RevPAR in our Spanish resorts. It will be a low digit RevPAR but nevertheless with the information that we have today, and the booking position coming from the UK, Germany and the figures that we have also from the Spanish tour operators, we are in the position to say that our Q3 the summer season will be ahead of last year. OK, thank you. Thank you. ACT Operator Thank you. Our next question comes from the line Isabel Carballo with BBVA. Please go ahead. Isabel Carballo - BBVA OK, hi, hello! Most of my question have already answered but I want to know after these results, what s your expectation for hotel EBITDA margin as you have mentioned that you are expecting some price increase in the second half? Thank you. Thank you, Isabel. Regarding the margin evolution, we have seen a sharp evolution of this in Q2. Looking at the second half of the year, we should see year-on-year, quarter by quarter an improvement of this taking into consideration that when looking at what we should expect in terms of RevPAR in Q3 and Q4, and I think that we have elaborated on that during the conference call. Roughly some 50% of the increase in RevPAR will be pretty much explained by average price increases. This is what at the end of the day explain in a more important way the evolution of margins. And we are expecting in Q3 and especially in Q4 taking into consideration that we are again more dependent on Latin America and the Caribbean a pick up in margins before year end. Transcript of ACT conference on 29 July 2010 Page 8

9 ACT Operator Thank you. Our next question is a follow-up question from the line of Tran Dang with BNP Paribas. Please go ahead. Hi, again. Regarding your covenant which will be tested in December, you are intending to meet these covenants. Do you intend to do other type of transactions which are nonoperating, i.e., like selling some assets in order to meet these covenants or do you think that you can meet them without any transaction like that? Let me see. We could meet the covenants with any further disposal - with any further capital gain before year-end. Nevertheless we do not rely on the possibility of selling an additional property. Look, that s not necessarily linked with the debt covenants but if the financial situation requires if you have read the report that we are releasing this evening, we do not this asset rotation is an activity that we have been doing for the last seven years. We have like 15 non-strategic assets/hotels that might go into the market if we get a good price for them taking into consideration that they are in our accounts at book value. Normally they would represent a nice chunk of capital gains in our accounts, right. So, the answer would be: (a) covenants might be met without generating any capital gain; (b) any further disposal might be possible if we find a good buyer for the assets that we have at enterprise. OK, thanks. Finally regarding your covenant again, do you intend to renegotiate the level of covenants at the same time as refinancing some of your maturities? That s possible, yes. OK, thank you. ACT Operator Thank you. Ladies and gentlemen, if there are any additional questions at this time, please press *1 on your touchtone phone. As a reminder, if you are using speaker equipment today, it will be necessary to lift the handset before making your selection. One moment please. Mr Lopez Garcia, as I saw no further questions at this time, I would like to turn the conference back to you for closing remarks. OK, thank you very much, you guys, for your attention and your time. We hope that we have been helpful here. Please do not hesitate to contact our investor relations department for any further questions you might have. Have a great holiday. ACT Operator Transcript of ACT conference on 29 July 2010 Page 9

10 Ladies and gentlemen, this concludes the Sol Melia First Semester 2010 Results Conference Call. If you would like to listen to a replay of today s conference, please dial or and enter the access code of followed by the pound. Thank you for your participation. You may now disconnect. END OF CONFERENCE Transcript of ACT conference on 29 July 2010 Page 10