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

Ladies and gentlemen, welcome to Scandic Hotels Group Q4 Report 2020. Today, I'm pleased to present Jens Mathiesen, President and CEO. [Operator Instructions] Please note, this call is being recorded. Speakers, please begin.

Thank you very much, operator, and good morning, everyone, and thank you for joining this presentation of Scandic's fourth quarter results. I'm here, as usual, together with our CFO, Jan Johansson, and our Head of Investor Relations; Henrik Vikström. If you start, please turn to Page 2 for a brief summary of the quarter. As we have previously communicated, we had a weak fourth quarter with increased government restrictions in all our markets. Our average occupancy rate was 23%, and our adjusted EBITDA turned negative. We are, though, convinced that we have seen the worst of this exceptional crisis and that the hotel markets will gradually recover during 2021. There is obviously still some uncertainty on how fast the market will pick up as it is so dependent on external factors, such as infection and death rates, how fast the vaccinations are carried out, et cetera. But we do see light in the end of the tunnel. We have, during the past few months, focused a lot on negotiating with our landlords and we have managed to reach agreements on total rent reductions of close to SEK 900 million. We have high focus on financing and liquidity. Our available liquidity today is around SEK 1.4 billion, and we expect our cash outflow to gradually decrease as occupancy picks up. And we still believe that we are able to generate positive cash flow at an occupancy rate around 50%. We are obviously working on operational measures to further reduce the negative cash flow, near term. In addition, we have today announced that we soon will present an owner-backed solution to strengthen our financial position. On Page 3, you can see the market occupancy development in the Nordic countries. January and February were normal months in terms of market occupancy last year, and our revenues were up year-on-year in both months. Then we saw a dramatic decline during the spring, and we reached all-time low levels in April in all our markets. The market recovered during the summer, driven by domestic leisure demand. And in Norway, for instance, market occupancy went from 7% in April to 54% in July. That shows how quickly things can improve when restrictions are eased. Thereafter, markets gradually slowed down again during the autumn on the back of increased infection rates and stricter government restrictions. As you can see, December was the weakest month in the fourth quarter in all Nordic countries, and January was pretty much in line with December. Scandic's average occupancy was around 15%, both in December and January. But that was somewhat affected, of course, by the fact that we took the decision to close half of our hotels during Christmas and New Year holiday. I should add also that we have seen a slight pickup from low levels in the past few weeks. For February, we expect average occupancy to be closer to 18%. Please turn to Page 4. Here, we show the monthly market RevPAR trends in the Nordic countries. For the Nordic region as a whole, average RevPAR was down by around 65% in the past quarter. Average prices are obviously down but that is partly explained by a negative mix effect as the biggest decline have been in the capital cities, as you can see on Page 5. Market occupancy was just above 20% in Stockholm and around 16%, 17% in Oslo, Helsinki and Copenhagen in the fourth quarter. This is less than 1/3 of what is normal. And these nations account for a big part of our business in a normal year. The average occupancy outside the capital cities have been around 30% in all Nordic cities and countries. We have some smaller destinations where demand has held up reasonably well, thanks to specific industrial projects. And we do also have a few wholesales in Western Norway, for instance, with quarantine business for the oil and offshore industry, but these are really exceptions. Please turn to Page 6. As we already have told early on, we have acted quickly and forcefully during 2020. When we saw the effect from the pandemic, we immediately took measures to protect our cash flow and to reduce our costs. Already in the second quarter, we have cut the non-rent cost base by around 60%. This means that we will enter the recovery with a very competitive cost base. And it should enable us to reach good profitability at occupancy levels that are lower than what we saw before the pandemic. We did also carry out a big refinancing in June, as you all know. We have, in the recent months, put a lot of effort into negotiating with our landlords, and that has today resulted in total rent reductions of around SEK 900 million. Please turn to Page 7. I would say that the dialogues with the landlords have been constructive in general. Out of the total agreed or offered rent rebates, most relates to 2020 to 2022. And a little more than half of the total amount is for this year. In relation to this, we have also extended some of our lease contracts. So the total duration of our hotel portfolio has increased by 1 year from around 11 to 12 years. That even includes our signed pipeline. We have also agreed on postponing the planned opening dates for a couple of our hotels in the pipeline for this year. At the present, some 15% of our lease contracts expire by the end of 2022 and 25% by the end of '25. This will give us the opportunity to renegotiate, of course, the terms, and we could potentially even also exit a few of them if we don't come to the right terms. Please turn to Page 8. On this page, you can see our signed pipeline at year-end. The pipeline has been somewhat reduced during the past year. Our only signing in 2020 was the takeover of Scandic Arlandastad in -- which was near Arlanda airport in Stockholm. This was a takeover where the previous operator went bankrupt, and we got it on very, very attractive terms with fully variable rents. The hotel was opened in early January this year. We have several planned openings schedule for this year, 2021. And as of today, we have agreed on postponing a couple of the planned openings such as Grand Central in Helsinki, and then Nørreport in Copenhagen. And there might be additional adjustments to the timetable, depending on how the market develops near-term and what we can agree, of course, with our counterparts. There's also a chance that some of the configurations could somewhat be modified. For instance, in one of the hotels we work on in Aarhus Harbor, which is scheduled for 2024. So if we haven't started the construction, we are overlooking whether some of this construction should be changed in the configuration. Obviously, we are constantly also working on optimizing both our portfolio and our pipeline. Please turn to Page 9 for a few comments on the outlook. We are convinced that the hotel markets will recover during this year, '21, and that markets will start to normalize during and after the summer. During the first half of the year, we expect a recovery where occupancy is increasing month by month, mainly driven by domestic and intra-Nordic leisure travel as vacations gain momentum and restrictions begin to ease. We believe that the pace of the recovery will gradually increase and that occupancy in this summer will exceed last year's level. Crucial to this scenario is that the infection and death rates continue to decrease until the vaccinations are completed. We expect a gradual market normalization from the summer and onward, when we should see more sports and cultural events, meetings and increased business travel. Initially, we expect that demand will be driven by intra-Nordic travel, which normal accounts for just over 80% of Scandic's total guest nights. And with that, I will hand it over to Jan to take you through some of the financial part of this presentation.

Thank you. Thank you, Jens. I will go quite fast through the revenues and results but be a little bit more, how to say, detailed around the cash flow here later on. And I will also go through what we expect in terms of governmental support for this year as it is an important component for us right now in stabilizing the results and cash flow. Looking at Q4, as you can see here in the exhibit here, you can see here that we lost -- it was a very, very difficult quarter. We lost SEK 3.4 billion in top line, as you can see here. We had came down to SEK 1.4 billion in revenues for one quarter, and we had a declining trend during the quarter, as you probably are aware. The average occupancy through this quarter was 23%, starting up a little bit north of 30% in the beginning and then 15% in December. And I think the last 2 weeks in December was on some 10%, 12%, something like that. So I think -- let's hope that, that was the bottom actually here and that we can grow from that bottom here. Also, when it comes to the sales content, of course, the meeting business and the F&B business has been particularly hurt due to restrictions that we are not able to organize meeting business. We have had restrictions in our restaurants and so on, which means that, that sales content has been very much difficult to sell during this period. And those restrictions are still prevailing here. But to take away some of that would, of course, be very, very supportive for that part of the business. As you can see here, also, we have a rate decline primarily -- predominantly a mix effect as those customer segment, which is present in our hotels right now, usually had the lowest prices. So we expect that the rates should go in the right direction when the customer mix start to normalize later on during the spring. As -- so 75% down, as we said, as Jens said here, a particular hit in the major cities. Smaller cities, regional cities doing better, of course, here. And that is due to the customer mix with more project business. We have some guaranteed business, as Jens mentioned, and so on. What has been particularly different between Q3 and Q4 is that individual leisure has been so weak. You might remember that we said that the Saturdays, what can you choose this year during Q3, that is not true anymore. So actually, the weekend has been quite weaker during Q4 and in the beginning of the year, with one exception, and that was last Saturday here, which was actually very good. If we then turn to the next page. You can see the adjusted EBITDA, minus SEK 282 million, not too bad during these circumstances. However, we had rent rebates as part of the negotiations, which we have had with the landlord, which have been retroactive into 2020, and those have been canceled in with SEK 180 million here in Q4 2020. Also governmental support with SEK 226 million into the numbers here. We have the full year number, excluding furlough, of a little bit more than SEK 700 million here from governmental support. So underlying, if you take away the rent rebates and take away the fixed -- government contribution to fixed costs, you have an underlying number of around SEK 700 million for the fourth quarter there. You can also see here that the item, center cost and group adjustment, was very, very good during the quarter. It's true we have reduced center costs, but that's not the full explanation here. We have also released provisions here with regard to incentive programs, et cetera, et cetera, which has had supported the result, a little bit of a onetime effect here. And the flip side of the coin of those -- I'll come back to that in a moment. I think we should go through to the next page is governmental support here. I think this is important. What we do expect for -- in governmental support was fixed cost for this first troublesome months during the year here, which we have calculated till June this year, is around SEK 400 million. How safe are those? Yes, the Norwegian program is decided and safe and we continue to apply for that. That's approximately half of this. Also, Sweden now have taken a decision, and we are ready to apply for that as soon as those web portals are opened, and that would give another, I would say, SEK 97 million is the roof here. And then we probably will have the same solution in Germany and Denmark a little bit later on. So that's the reason why we calculate with this SEK 400 million during the spring. Of those, maybe some SEK 30 million, SEK 40 million is already paid out this year. It's also some -- we have also been able here, according to Swedish regulation here, to continue to postpone the VAT and social security charges. We had an initial amount of SEK 240 million. That is now possible to postpone 1 more year into the beginning of '22. But on top of that, and we had actually been granted additional credits of SEK 200 million. So the total amount is now SEK 440 million, which is still a little bit more than 1 year from now on. So this is, of course, very, very helpful for the cash flow here. Now on the SEK 200 million, the external, they are actually now included in the number, which I will come back to in a moment. Also, very, very good for us in order to control internal efficiency is that the furlough opportunities are continued in all the countries during the spring here. So that will give us an opportunity to work with internal efficiency without actually making people redundant. So we believe that this is a very, very flexible way, and that would help, I think, both the employees and also Scandic to come through this last part of the pandemic. So with that, next page here, the cash flow, I think, is on that page here, yes. If we go through this one, it's quite a big difference between the adjusted EBITDA and the free cash flow for the month here, and we need to take you through that. This is minus SEK 1.3 billion. So if you would look upon the underlying cash flow here, we estimate that, that is around SEK 300 million. And how can I arrive on that number here when we have an astonishing SEK 1.3 billion in this picture here? And this has been a little bit triggered on the rent negotiations because that has meant that we have settled the rent balances a little bit earlier than we thought we should do. So some of these rent rebates has been, how to say, taken against these rent balances. And that we approximate that number to be around SEK 400 million for the fourth quarter. Of this change in working capital, around half of that is connected to settling these rent balances. It's also so that you remember that I talked about the governmental support of fixed cost. Only 1/3 of that was actually paid out during Q4. A big part of SEK 150 million came actually into the beginning of 2021 here. And then as I mentioned, we had a release of some provisions here, also here one-time during Q4. So I think as a good guidance, as a good benchmark, at an occupancy level of 23%, underlying cash flow around SEK 300 million here. You can also see expansion CapEx and investment in existing operations, in total, SEK 150 million a quarter. That would probably also serve as a good benchmark here -- going forward here into the spring. Despite the high number of new openings here, we have worked diligently with that and see to that we will try to be able to keep the cash outflow from investments on around SEK 150 million a quarter here. And -- so that this -- and I think also when we're looking into now the cash flow into this year here, monthly cash flow will be predominantly then a function of the occupancy, as Jens mentioned. But you should also remember of this SEK 400 million in anticipated governmental support. I would say that around SEK 350 million has not yet been paid out, and that should support the cash flow going forward. Starting point right now in this week is SEK 1.4 billion, including the SEK 200 million in tax credit here. Then I think you had all the data points here in order to understand this going forward. And sensitivity then, just as a benchmark. If you have 1% in change in occupancy that impacts the cash flow with some SEK 10 million to SEK 15 million a month before investments, that could serve as a very decent benchmark for you when thinking through this. So 1% in occupancy change makes SEK 10 million to SEK 15 million a month approximately. So with that, I think I'll leave the word back to you, Jens. Thank you.

Thank you very much, Jan. And if you please turn to the last page, 16, some -- a few concluding remarks from my side. We believe that Scandic is well positioned for a market recovery. Following, of course, these massive cost reductions that we did in 2020, we enter this year with a very slim cost base, and we have improved our ability to generate very good margins at lower occupancy levels than before. On top of that, we also have a very proven, efficient operating model, and we benefit from unique economies of scale both in the operation, but also within sales and marketing. We do, in my opinion, have a very attractive hotel portfolio and also pipeline. And we do offer by far the most extensive hotel network in the Nordics. We are now successfully opening up hotels that have been closed. So looking at the Christmas time, we even had around half of the hotels being closed. And when we enter into beginning of March, most of the hotels are reopened and only approximately some 10 to 12 are still being closed. So the majority of our hotels are open for business when we enter into beginning of March. And finally, we have a customer offering, which is for all. Our core is the broad mid-market which, let's say, Nordic guest normally is accounting for more than 80% of our guest nights. So we believe that will be the driver when market starts to normalize during this year. With that, I hand it back to you, operator, for the Q&A.

[Operator Instructions] Our first question is from Adela Dashian of Handelsbanken.

First and foremost, I want to ask a little bit more about your financial position, and if you could give us some more color on the financial solution that you say you will announce shortly?

Yes. No, I think we are very -- I think we try to be as open as we always are. We are working right now on finding the right solution for this. And we have a very good cooperation and dialogue, together with our main shareholders, to find the right way of handling it. I think as you all recognize, we, today, have reached SEK 1.4 billion, but it's also obvious that I, as a CEO, I want to operate a company that has enough liquidity even in these tough times. So that's why we look over how to deal with that also onward. So we are working on solutions, but haven't decided yet. If we had decided exactly what to do, then we would have announced it today. But we are working on it, and I expect us to come shortly with a solution for the company.

Can I then ask what the reason for commenting on it in the report is, if you're not able to give us any more details at this point?

We think we are -- it's very openly obvious that we, together with the owners, want to deal with this and thereby already have started the work. We just haven't settled up and therefore, I think it's fair not to be silent about it. And you would question a lot what do you expect to do in the future and then in short time present with the solution. So we like to be very open to the market, which we always are and that's why we also communicated that we are working with a solution.

But obviously, I mean, we have -- I mean, obviously, we would have liked to be much more clear and definite on this, but the fact is that we aren't. But we cannot really keep you in the dark either and say that we don't work with it. So I think it's -- of course, you need to take a decision there. And we took the decision, we need to tell you that we have something cooking.

All right. But could you tell us -- is it more about surviving in the current situation that we're in? Or is it more of like an offensive decision to preparing for the recovery that you're expected to enter into?

You can say that with the recovering pace that we expect, you can say that enables us, hopefully, to take us through with the current cash position and liquidity position. But I don't want to be, let's say, on the risk of that. So I want to be sure that we have enough liquidity, even if, let's say, restrictions are continuing a few months further ahead. That's why we work with different scenarios to do this in good order and in good time and not in a stressed situation. So it might be a situation that also secures that we have strong liquidity or good liquidity when the market now is recovering in order to act in such a market situation.

All right. And then some clarity on rent reductions that you've already agreed upon with your landlords. You say that rent rebates amounted to just under SEK 200 million in Q4. So does this SEK 900 million that you're talking about, does that include or exclude the SEK 180 million in Q4?

It's included in that. So the total amount is around SEK 900 million, where we accounted for a certain part in Q4. And more than half of this SEK 900 million is related to this year and then some to next year.

Got it. Okay. And then finally, on your expectations for recovery. Well, I believe that you most likely will continue to benefit from the staycation trend this summer as well. But then we all know that you have a lot of exposure to business and corporate travelers and that drives demand after the summer months. So what are your expectations for this segment to recover? And do you expect it to ever go back to normal levels?

Well, it's very difficult to predict what would be the normal levels in the future. We don't really know. But I think when we look at crisis we have seen before, financial downturn, et cetera, we know that market has a tendency to come back pretty fast. And we also know that people tend to forget very fast, and they want to come back. So I think we will see that the initial, let's say, growth rates will definitely be driven by leisure and the local corporate. We are quite strong in both areas of the business. We need to be with operating 270 hotels and equally as many leisure days as corporate days. So we're actually quite strong in both segments. And then there -- but I think we definitely have seen that it has been tough the last year when it comes to the corporate traveling. And I think we will see a lot of leisure in the beginning of this year until summer and mid-summer, will definitely be a lot of leisure-driven. And then I think as of August and ahead, we will see a much bigger impact coming back from the corporate. Right now, you can say the corporate traffic we actually do have in the hotels is related to, let's say, infrastructure workers and project business and things like that.

Okay. But we've also seen throughout the pandemic that digital interactions have spiked up tremendously. So how do you prepare to maybe not best capitalize on that, but can you give anything?

Well, we have even during -- yes, I think it's a good question actually, because we have actually, even during this difficult year, we have actually introduced 2 major things. We have introduced a co-working solution, which means that all Scandic Hotels are open for coworkers. Meaning that instead of people coming back to sit in the office, they can actually go to the nearby Scandic Hotel and work from there. And we have a very clear solution for that and was the first chain to initiate that in the market already just after the summer last year. On top of that, we do work with different digital solution when it comes to meetings so that we actually offer strong digital solutions. So you can go to Scandic in a meeting room, and have the best digital solution to have your online meetings with the rest of the world, if you don't have those solutions at home. So I think we are looking also to take, let's say, cater for that change segment in the future, which definitely will be more digital than it was in the past.

All right. And then just finally on the Scandic GO concept that you announced just about a year ago during your Capital Markets Day. Obviously, that's probably not top of mind for you at the moment. But are you still -- do you still -- is this still something that you plan on launching once we've reached a more normalized state, post pandemic?

Yes, absolutely. Scandic GO is here to stay long term, you can say. Of course, we were a bit stopped by the pandemic. So it is on hold until we see now that we've changed, but we are still working on this, even have had good time now to work a bit more on the different concepts. But definitely Scandic GO will be launched, and we expect a lot of Scandic GOs as part of our growth plans in the future.

Our next question is from Stefan Andersson of SEB.

Just 3 questions from me. First, and maybe I missed it in your prepared remarks. First, on the rent reduction, the SEK 900 million there. Is there any of those that are -- that there's a clawback of some kind that it could be altered if the markets recover quickly? Or are the SEK 900 million already in your hands, so to speak?

Yes, it's a -- Stefan, Jan here. It's a combination of 2 things, you can say. One is, of course, a plain reduction of the fixed rents, which we do have in some contracts. The other component is a reduction of the guaranteed level, which means, of course, that -- and the variable part remains in the contracts. I mean, of course, it could be less than SEK 900 million. But the reason for that is, in that case, that it has gone much faster than we anticipated. So that would probably be good news anyway. So that's how it works. It's both a kind of fixed reduction and it's also a lowering of the guarantees. So you can say the SEK 900 million is an estimate what that lowering of guaranteed level would mean. So that's the reason why we write up to SEK 900 million.

Okay. Okay. And when you say up to SEK 900 million you say it's an estimate, is it based on your estimate given a recovery during the summer and then onwards? Or could it be more than SEK 900 million, if things go really bad, which [indiscernible].

That would mean that we continue negotiations and more negotiations, and it could be SEK 900 million, but not from the present agreements.

Yes, okay. And so if I understood -- yes, I don't think you can split it up, I guess. I mean, because if you have a recovery, I guess, the minimum rents are not -- the savings you do on the minimum rents are not valid as the market comes back. So maybe if you could elaborate on how much of the SEK 900 million that is related to minimum there? But maybe that's too difficult. Sorry, if I...

Yes, that I think, Stefan, when -- to give you a guidance here, so I think you should -- even if we had a very strong autumn, I mean, very much of this month where we are sitting right now will be very, very difficult. So I think, I would say that if it goes really, really well, it not might be SEK 900 million, it might be SEK 800 million or something like that, but it's not high -- yes, yes, yes.

And it's also important for us to be very clear that a lot of these discounts that we have negotiated or rebates we have been negotiated is related especially to the difficult first half. So main part of it is now in Q1 and Q2, so where we really need more support. And we expect the recovery from the summer and ahead to be stronger. And therefore, you would say, we trust that we will not be that far from this amount.

Yes. So when you're modeling, I think you should assume some 65% in the first half and the remainder in the second.

Yes, perfect. And then the second question, talking about the financials there, the SEK 1.4 billion. I mean, you mentioned the tax credit. I think you said SEK 200 million, which is postponed a year, if I'm correct. Is there anything else that you've been given, so to speak, as of today, relating to SEK 1,400 million, is there any...

One-offs?

Or subcontracted -- no, no, I just mean is there any outstanding payments that you have been released from and will pay later this year from the landlords that are similar?

No. As I said, I think what we have done here is we have cleared some -- the remaining governmental support from 2020 has been paid in here during the beginning of the year. And we have also settled the outstanding part of their rent balances. So I think, as I said earlier, if you start with SEK 1.4 billion, you may or may not believe my projection on governmental support for the rest of the year. And then I said, then you can just calculate with your own, how to say, recovery here, in person, and use what I said here as a benchmark from Q4. I think that's the way to look upon it here. So it's basically reasonably clean now. What is important to remember also, of course, is that we are paying rents according to contract now. So we are paying -- we are prepaying the rents as we normally do. So it means that every quarter, you will have a little bit of a dip there.

Okay. Good. And the final question, this is, of course, difficult to answer, but you're more -- you're very experienced from the hotel industry and been in it for a long time. So just looking back on recessions, which is very different to what we have today, it's always been a little bit tricky to recover price. Customers are getting used to lower prices, and there's a little bit of an oversupply. So you know how it is, it takes a few years to recover. What is your best guess in the situation we have here? Is the market -- is the industry better at maintaining prices than going back 20 years or what is your thinking about that? I know it's very difficult, but just trying at least.

It's a very -- I'm old enough to be -- I've been part of many crises before, so I know exactly what you're questioning. And I think if you look at back to the -- both the financial downturn we had in '08, '09 and even in the crisis we have had some 10 years before that, you're definitely right that market has changed quite a lot. Today, all hotel chains do work with revenue management. We have a lot of support from international systems like ideas, et cetera, which we all use that is definitely helping us. So a lot of the price, you can say, dip or drop, will definitely also be linked to the different segments. And of course, we expect some of the, let's say, well-paid segments like rich Americans coming in, that might not happen during the autumn. It might only happen, let's say, in '22 and ahead. So we don't expect a lot of international traveling at all even in the autumn. Even though we open up and we might open all the borders, we think that we will work with the inter-Nordic business as the premier one. And, of course, then we are missing some of the well-paid Americans, for instance, and a lot of British, et cetera, and that will come later. So I think we will be better at working with prices as an industry today than we were 10 or 20 years ahead -- ago. But definitely, it will take us some time. We will not be able to deliver the same average room rates, as you saw in '19. That will take years like to bring back the occupancy levels.

Our next question is from Jamie Rollo of Morgan Stanley.

First of all, I was wondering about the confidence in or the hopes of the summer occupancy is above last year. Is there anything you're seeing in sort of forward leisure or other bookings that gives you that confidence? I appreciate it's some time away, but any indications there would be helpful.

Well, first of all, I think we -- if you compare with last year, as I mentioned before, we were at all-time low levels in April of some 6% nearly and 8% in May. And right now, we talk about 18% in this month and, let's say, a growing occupancy level in the coming months. Just by that, we have a much better exit point than we did a year ago. And then we also saw how fast and the speed of, let's say, the vacation actually will hit us, like going from in Norway from 7%, we mentioned, to 53% in July last year. So I think we have a lot of confidence in why it is what it is. And this, of course, linked also to the fact of the spread of this vaccination programs, you can say, and the speed of that. Even though we are a bit slower in some of these markets, we still think that most of the population will be vaccinated by the end of June. And therefore, I think we have a lot of, let's say, facts linked to this expectation.