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

Thank you very much, and good morning, everyone, and first of all, also thank you all of you for joining Scandic's presentation of the second quarter 2023 on a busy reporting day. My name is Jens Mathiesen, and I'm the CEO of Scandic and like always together with me, I have Åsa Wirén, our CFO, and we will take you through the quarter together. Firstly, I would like to start off with wishing everyone at Scandic a happy birthday because today, actually, Scandic turns 60 years. It's been 6 decades since we on July 14, 1963, opened our first Esso Motorhotell in Laxå in Sweden. So we have actually gone from one hotel, you would say, one roadside hotel to 269 hotels in operation in 6 markets with nearly 56,000 hotel rooms and over 19,000 team members. This is quite an achievement. Therefore, both Åsa and I are maybe a bit extra happy today to present the second quarter on this 60th birthday. With that said, please turn to Page 2, and we'll jump straight into some highlights of the quarter. I'm very pleased to present another strong quarter. The market development was strong in the quarter and with high demand and continued positive price development. So demand was on high levels from both leisure and corporate in all our markets, and we actually reported an all-time high RevPAR during this quarter. The occupancy rate was 63%, which was on par with the second quarter last year and it was in line with our guidance. We have an average of just over 3% more rooms in operation compared with the second quarter last year. And this means that we sold more rooms than we did last year. I'm, of course, very proud of how we have met the market commercially that we run our hotels very efficiently and that our guests are also very satisfied. We also delivered improved net sales and a strong result, which we will talk you through during this call. Our financial position has improved to a strong level. And during the year, we have actually gradually increased the activity level and launched several initiatives with a commercial and data-driven focus to build a stronger Scandic. This includes initiatives within IT and commercial skill development of employees, initiatives within health and well-being and also our new brand, Scandic GO. So ultimately, this enables a faster growth and even improved margins. The establishment of Scandic GO, our newly launched brand in the fast-growing economy segment is underway. And we are keeping a high pace in all our markets to take a leading role in the Nordics. In the beginning of July, we also announced our second signing, which is also in downtown Stockholm, but this time in a part of the city where we don't operate any hotels today. Lastly, we have entered a very busy summer period, and we expect a strong third quarter with high demand and increasing prices. So all in all, this was a strong quarter, and we are well positioned and well -- and very excited for a second half of the year. Please move to Page 3, where you can see quarterly adjusted EBITDA development since the beginning of 2020. We report an adjusted EBITDA of SEK 772 million compared with SEK 1.083 billion in the second quarter last year. This is indeed a strong result. As you all know, Q2 last year was heavily impacted by positive one-offs. And since the restrictions eased in 2022, we have continuously recruited and skill developed more than 8,000 team members in order to meet the higher demand. As I mentioned also, we have gradually ramped up the activity level within Scandic this year. Excluding one-offs, the adjusted EBITDA margin improved significantly compared with the second quarter of 1920 -- sorry, 2019. Altogether, we report a strong result driven by a solid market development in combination with high efficiency. Also, we'll, of course, take you through the financial development later in this presentation. But please turn to Page 4. Here, you can see the monthly market occupancy in the Nordic countries. The market development was solid with high demand from both corporate and leisure. Scandic reported an occupancy rate of 63% in the quarter, which was on par with the second quarter last year. We are now beyond what we say is talking about the pent-up demand now with 5 quarters with good demand in a row. Domestic travel and travel between the Nordic countries are at continued high levels. The lacking occupancy compared to 2019 is explained by lower volumes of intercontinental travelers still. However, this segment continues to recover during the spring and early summer. The demand for entertainment has been high with concerts, sports events and other type of events that contributed positively to both demand and price development. Please turn to Page 5. This is market data for average room rates for Sweden, Norway, Finland and Denmark, indexed still to the corresponding month in 2019. We continue to see rising room rates well above 2019 levels. Scandic's average room rate was around 15% to 21% above 2019 levels in the second quarter and 8% to 10% above 2022 levels. Finland has lagged the other markets but are as well recovering. Please turn to Page 6. Here, you can see the market RevPAR development. Also indexed to corresponding months 2019, the RevPAR development was strong in the quarter with Norway continuing to be the strongest market at levels 20% to 30% above 2019 levels. Scandic reached a new record level with RevPAR of SEK 828 in the quarter, which is compared with SEK 749 in 2022 and SEK 745 in 2019. On average, we have just over 3% more rooms in the quarter compared to the second quarter in 2022. Please turn to Page 7. Last quarter, we announced -- I would say, finally reannounced, you can say, Scandic GO, our new brand in the fast-growing economy segment. Our ambition is to take a leading position in the segment and we keep a high pace to reach this ambition. In the beginning of July, we signed our second Scandic GO, a new hotel with 221 compact hotel rooms and space-efficient configuration. This type of property and hotel configuration enables higher share room revenue and lower CapEx than a full-service hotel. And it is what we are looking for when in search for new locations and properties. The hotel will open in late summer 2024, so after summer next year, following renovation and technical upgrades and will be certified according to the Nordic Swan Ecolabel after the opening. Please turn to Page 8. This was the pipeline at the end of the quarter. With our improved financial position and commercial approach, we keep a high pace to ensure growth while optimizing the portfolio. As the expansion of Scandic GO continues, we have great interest from partners, landlords and property owners, and we look forward to bringing more Scandic hotels to our markets. Looking forward to the second half of the year, we are increasing investment for renovations of existing hotels to create even a more competitive portfolio. We are coming from a period, of course, focused very much on building a strong balance sheet, and we can now grow from a position of strength. We are very determined to get back to our targets of a maintenance CapEx of between 3% and 4% of the turnover. We will continue to optimize our portfolio and add more hotels as well as also exit in hotels with limited potential or low financial performance. We have very few hotels now with low financial performance, but also as we communicated in the first quarter, we will, between Q3 this year and Q2 next year, exit 5 hotels with a total of 731 rooms. With that, please turn to Page 9. And I would like to pass it over to our CFO, Åsa Wirén, to take us through some financial numbers.

Thank you, Jens, and good morning, everyone. Please turn to Page 10 then, and we will start off with the financials for the quarter. We delivered a quarter with improved net sales and strong results. Net sales increased by 8% to SEK 5.7 billion compared to the second quarter of last year. We reported a strong result with an adjusted EBITDA of SEK 772 million, corresponding to a margin of 13.6% compared to 20.5% in the second quarter last year. But I want to highlight that Q2 last year included SEK 261 million in one-offs, mainly related to governmental support and compensation related to the agreement with the Norwegian state for preparedness for housing of refugees. We had low one-offs of SEK 20 million in this quarter and the adjusted EBITDA margin, excluding one-offs, was 13.3% compared to 16.1% in the second quarter of last year. This was also a significant improvement of almost 2 percentage points compared to Q2 in 2019. We have a strong financial position. And as Jens mentioned in the beginning of this presentation, we have increased the activity level with several initiatives with the commercial and data-driven focus to build a stronger Scandic. And we will, of course, come back today to those initiatives later on for this year. This is partly reflected in higher central costs this quarter. In addition to the one-offs, the gap in the results compared with the second quarter last year is explained by the ramp-up of the organization as we have recruited and trained over 8,000 employees since the restrictions eased in 2022. We are constantly focusing on the operating margin and with a higher pace and more initiatives to further drive our commercial ability, digitalization and, of course, efficiency. In Q3, we expect one-offs with a positive adjusted EBITDA effect of around SEK 20 million. This is related to housing for refugees in Norway. And I also want to remind you that we had one-offs in the third quarter last year of SEK 76 million. So please then turn to Page 11. Free cash flow improved slightly to SEK 306 million, driven by higher turnover, improved results and lower CapEx compared to the first half of last year. Q2 itself delivered SEK 664 million, almost tripled compared to 2019, which is very strong. The macroeconomic uncertainty in the beginning of this year helped actually back investment, and we had a cautious approach with low CapEx in the first half year. With the market development during the spring and early summer months and our strong financial position, we plan for higher CapEx later this year. Working capital was negatively impacted by the previously communicated repayment of variable rent debts for 2022 of about SEK 700 million. And excluding the effect of repaid rent debts, the development of working capital was positive, driven by increased operating liabilities. So please then turn to Page 12. And as Jens also mentioned, we have a strong financial position and we continue to reduce our debt levels. Net debt increased to SEK 2.8 billion in the quarter and corresponded to a net debt in relation to adjusted EBITDA of 1.1x on a rolling 12-month basis. This was lower than in the previous quarter where the net debt in relation to adjusted EBITDA amounted to 1.2x and in line with the debt level at year-end of 2022. Net debt included SEK 1.6 billion related to the convertible bond and SEK 841 million related to deferred VAT payments and social security contributions in Sweden. Excluding the convertible bond, net debt in relation to adjusted EBITDA amounted to 0.5x. Our available credit facility amounted to SEK 3.2 billion, and total available liquidity amounted to SEK 2.7 billion at the end of the quarter. Lastly, the convertible bond has its conversion price of SEK 43.36 and as you know, matures in October 2024, with a potential dilution of 41.5 million shares. And lastly, please turn to Page 13. Here, you can see the financial net items and impact from IFRS 16. Including IFRS 16, the reported financial net was minus SEK 503 million. Excluded for IFRS 16, the financial net was minus SEK 72 million. And noncash convertible interest was minus SEK 42 million. Interest payments on bank loans decreased as a result of our lower debt level. Ultimately, cash financial items amounted to minus SEK 29 million. A lot of figures there. So with that said, please turn to Page 14, and back to you, Jens, for some final comments and some outlook.

Thank you very much, Åsa. And let's move straight into Page 15. Some concluding remarks and also some reflections on the outlook from my side. It is really pleasing to see how we, as a company improve and that we have -- with all these efforts we put in day-to-day, we create very strong results. Looking at the first 6 months this year compared with 2019, we actually increased the adjusted EBITDA with over SEK 220 million, and the improved -- we also improved the margin of 1.1 percentage points from 8.1% to 9.2%. So a really strong development when we compare these years. This is really also something that confirms our ambition to build a stronger and more profitable Scandic after the pandemic. Then some outlook. We expect a strong third quarter, driven by continued high levels of leisure travel during the summer as well as business travel and meeting gaining momentum in the latter part of the quarter. So based on the current booking situation, we expect occupancy to be on par with the same period last year, but continuing also at higher average prices per room. So with good momentum, we look forward to an eventful summer and I want to thank all employees for their fantastic commitment in every day's work and our owners and guests for their trust and belief in Scandic. With that said, back to you, operator, for the Q&A.

[Operator Instructions] The next question comes from Adela Dashian from Jefferies.

Just a few questions from me. The first one relates to your outlook as we think beyond just the summer months because I think we can now conclude from what's going on right now in the general environment that the summer will most likely be pretty solid driven by the currency rates and all of that. But if we look beyond that and into the fall, when you do become a bit more dependent on the business travelers, and also with the fact that the general sentiment out there is that things will weaken to some extent due to macroeconomic factors and so on, how are you positioned to tackle that kind of a scenario? And I do realize that it's still early days, but are you able to gauge anything in terms of demand post summer based on current bookings?

First -- thank you, Adela, for the question. But first of all, I would like to address and point out that we see no decline from the corporate segment. The corporate segment has been extremely stable. And as I said, I think we are beyond the point of talking about pent-up demand. Then you can talk about what happens. And for me, it's a bit like the wolf is coming, the wolf is coming. We don't know whether it's coming or not. But I see that inflation is going down. I think interest rates globally has stabilized. And I think that businesses are doing, overall, very strong. So all in all, I don't see the same macroeconomic concerns, especially related to our industry because there's a tendency and has been for all the period. But despite the 2 years of pandemic that our industry is very, very stable. So I think we see that we expect it to be stable also during the autumn, it looks very stable. When we look at the booking patterns, and we look at this every day, every day, we look at the in booking trends versus same time last year. And when we look at this, we can say that right now, it looks to be in line with last year on occupancy, meaning that we actually sell a few more rooms because we have more rooms available and at much higher prices. So right now, you might all talk about wolf is coming. We don't see it for our industry. And even if it is, let's say that potentially something was happening like we saw -- maybe after the financial downturn, Scandic is much better prepared for this after a pandemic. I can tell you we are extremely fast in turning around, if need be, when it comes to manning, et cetera. But we are way above paying guarantee rents, et cetera. So all in all, I think Scandic is better positioned for anything that might happen. If it drops a few percentage points, we will handle it. But right now, I need to outline we don't see it.

Yes. Great. That's very good color. I appreciate that. In terms of your expectations for average room rates, if we see inflation stabilizing at this point or even going down, is the expectation also then, obviously, that the average room rate should also stop increasing from these very high levels?

Yes. With a few percentage points, you're right, it could potentially happen. We have a good tendency of being able to handle inflation. And you have seen when we talk about Q2, we talk about 8% to 10% up versus last year, month by month. And when you compare with '19, we are up between 15% and 21%. I think July will be even a bit higher, and I think the autumn might stabilize somewhat, but stabilized versus still with increases versus last year, whether then that is up 8% or whether it's up 6% or 10%, yet to be seen versus last year. But we will be able to handle the, let's say, inflationary levels, and that's the most important thing so that we can keep stabilized the margins and earnings.

Got it. All right. And then if I could just compare Q3 this year versus last year, and especially in the Norwegian operations where you were positively impacted by the refugee housing. How does the -- what did that look like in Q3 last year? And should we expect a bigger deviation like in this quarter on the top line performance due to that?

I think we have very, very little -- limited and also you might put something into it. But all in all, we have -- we don't have a lot of this. We have a few still in Norwegian -- in Norway, we still have a few rooms out for the government for -- preparing for refugees coming in, but it's on a very limited level. So not really something that has a huge impact. When that set, I would say what we have done in Norway is a fantastic journey. And if you look at the -- now you can actually compare the quarter -- let's say, compare the Q2 with Q2 in 2019. And you've seen that in Norway, we have managed to turn around the business in a strong, strong way with much, much higher margins and results.

Yes. And as I said, we foresee about approximately SEK 20 million in Q3 related to the Norwegian housing refugees.

And it was SEK 76 million last year, just to be clear.

That was all in all one-offs, but the main part was, of course this one.

Yes.

The next question comes from Jamie Rollo from Morgan Stanley.

Three questions, please. First of all, just on the forward-looking commentary about occupancy being similar year-on-year in the third quarter. You're also saying meetings are rebounding, business will recover towards the end of -- or post the summer. I mean, are you expecting, therefore, slightly negative occupancy year-on-year in leisure? Or is something else sort of in that sort of wording that I've sort of misinterpreted? Secondly, on cost inflation, I know you're mostly hedged on energy, I think, 90% this year. Next year, I think that comes down a bit to 70%. I mean is there anything material on a year-on-year basis on cost on energy. And similarly, if you can give us an update on where we are on labor costs, too. And the final one is just on the pipeline. I mean, it's almost -- obviously, you had a lot of openings the last year or 2, but it's almost sort of on the low side, particularly given the opportunity for Scandic GO, so I was wondering about when that's going to be rebuilt and what we should think about for sort of medium-term room openings a year.