Orient-Express Hotels Ltd. Q1 2009 Earnings Call Transcript

Orient-Express Hotels Ltd. (OEH)

Q1 2009 Earnings Call

May 7, 2009 10:00 am ET

Executives

Pippa Isbell - VP, Corporate Communications

Ned Hetherington -VP, General Counsel and Secretary

Paul White - President and CEO

Martin O’Grady - VP and CFO

Analyst

Joe Greff - JPMorgan

Nitin Bhalotia - Leo Fund Managers

Ross Haberman - Haberman Fund

Chris Woronka - Deutsche Bank

Presentation

Operator

Good morning and good afternoon ladies and gentlemen and welcome to Orient-Express Hotels First Quarter 2009 Results Conference Call. My name is Wendy and I’ll be your coordinator for this conference. Throughout the presentation, you will be on listen-only. However at the end of the call, there will be an opportunity to ask any question. (Operator Instructions).

I will hand you over to Pippa Isbell, Vice President of Corporate Communications to begin today's conference.

Pippa Isbell

Good morning, ladies and gentlemen. As the operator indicated, this is the first quarter Earnings Call for Orient-Express Hotels. We issued our news release last night and it's available on our website at orient-express.com as well as on the SEC website.

For anyone who has not yet seen it, the summary is as follows: First quarter total revenues excluding real estate of $91 million are down $24.9 million over the prior year. Same store RevPAR down 18% in local currency, U.S. $26%.

Adjusted EBITDA before Real Estate of $9.9 million, down $7.0 million over prior year

First quarter net loss from continuing operations of $13.6 million.

EPS loss from continuing operations of $0.27 per common share

On the call today are Jim Hurlock, Chairman of Orient- Express Hotels, Paul White, President and Chief Executive Officer, Martin O’Grady, Chief Financial Officer and Ned Hetherington, Company Secretary to whom I will now hand over for the usual announcements. Ned.

Ned Hetherington

Okay. Thank you, Pippa. I would like to do with our usual housekeeping matter before we get started. And that is our cautionary statement under the Private Securities Litigation Reform Act of 1995.

In the course of remarks due today by Orient-Express Hotels' Management and then answering your questions, they may make forward-looking statements concerning Orient-Express Hotels, such as its earnings outlook, future investment plans, and other matters that are not historic facts. We caution that actual results of Orient-Express Hotels may differ materially from these forward-looking statements.

Information about factors that could cause actual results to differ is set out in today's news release, the Company's latest annual report to shareholders, and the filings of the Company with the Securities and Exchange Commission.

That's all I have. I'll now turn the call over to Paul White our CEO.

Paul White

Thanks Ned. Good morning everyone. I am pleased to be speaking to you all today, after a quarter in which we saw the actions taken by the Company in the second half of 2008, translating to results, very much inline with our own expectation.

The key issues for the Company over the past year have been to minimize the drop in revenue caused by the economic environment whereas keeping a very tight hold on cost as well as cash flow.

RevPAR across the group was 18% down in local currency, as similar levels to what we saw in the fourth quarter of 2008.

Revenue from operations dropped by $25 million, but adjusted EBITDA dropped by less then $7 million.

About five weeks ago, I visited our U.S. Properties, it was about this time when we detected a level of stabilization in bookings trends.

Our U.S. properties in New Orleans and Washington area were in positive territory. Globally bookings paid for the past months has been very much inline we've had at 12 months ago. Is this is positive or not? Clearly one can't get excited about four weeks of data, but in today's environment a fluffing of pace has to be viewed as best of news. Even if the start point is 25% behind the equivalent pace of one year ago.

Before I speak in more detail about the bookings and the general outlook, a few words on the capital rates we completed last week.

Our strategy, has been quite straight forward, step one, was to sort out the profit and loss account, clean-up the Company's cost strength, structure and ensure that OEH is well set for recovery.

There are different ways of achieving this. The key issue for me is that any savings must be permanent. Examples of permanent savings are those made where you actually address the way you conduct business, and strive for efficiencies which was done at the test of time. Simply cutting a few heads temporarily and taking them back on in good times is not the answer.

Our distribution sales, marketing, administration and overhead areas in general have been the key to these savings. We have broken down some significant cost senses to achieve this. This Company has always benefited from its decentralized approach to general management and today this is again ensuring maximum flexibility.

Other savings linked to green initiative, use of technology and asset management are areas where OEH and the industry had room to improve. And I'm pleased to say they are improving. All three do involved investment with the green issues requiring very skillful management.

The second step was to address the balance sheet, with debt of approximately $850 million on a trailing 12 month EBITDA of just under $120 million. The Company's debt to EBITDA was clearly too high. We feel that this Company should trade in the four to five times range, based on average earnings over cycle, not peak, not trough.

On today’s EBITDA, that would support a $450 million to $550 million debt range.

The money we raised last week, immediately reduces our debt-to-EBITDA, of around six times, so what else do we need to do?

There are two specific areas where the Company has been working to enable us to achieve these goals, but in a timely manner. Firstly, we are making progress with the disposal of some non-core asset. We intend to dispose all these asset over the next two to three years which should (weight) approximately 150 million to 200 million of gross proceeds.

These asset sales include two which we are currently in due diligence and are progressing at a pace in line with market condition. The buyers, the private buyers and that’s the key is to close the deal at the right level and not rush them through.

The second area is the area of developed real estate, where we have eight completed luxury Villas in St Martin to sell. We’ll be going to the market with these later this year but already have one Villa under offer. With Porto Cupecoy scheduled for completion later this year and 11 units sold so far in 2009. The signs are a little better on the real estate side.

Net of debt, we expect with sales of real estate to bring in cash of between a $105 million and $145 million over the next three years.

On the assumption, that operations are cash neutral, this could see debt reduced well within the target range by 2011.

So back to the outlook, as I said earlier, we are seeing a flattening of pace, with most recent data in quarter two, whereas recent data showing the following: Quarter two which is May and June is 22% below the same pace this time last year. This is on a volume basis, not on a revenue basis. Quarter three, 25% off and Quarter four, 13% off, but one month ago, these figures read 26, 31 and 22 respectively. If we slice these numbers by region, you get a similar story.

To the yearend, Europe is 32% off, USA 22 and the rest of the world only 11% off, this again compared to 35, 24 and 24 one month ago.

The numbers, are moving on a weekly basis, last week was very soft clearly influenced by this Swine Flu announcement.

Finally, it's important that even in these difficult times, we continue to develop our portfolio. I stress the importance of working within our means on capital expenditure, and ensuring that expenditures yield returns.

In the first quarter, we delivered on three projects. We opened 22 new pool suites in Bali and the Cipriani reopen for the season with 11 new suites created from 14 entry level rooms, continue in the enhancement program we began last year.

In addition, at the Copacabana Palace the new talk of Rio is the bar, which in its first four weeks of operation took $160,000 in revenue, puts it on track for taking $2 million for the year.

And finally, I am pleased to say that the Road To Mandalay was re-floated during the month. And we began operations again in August and have already got two full sellout charters for the fourth quarter.

And with that, I'll hand over to Martin.

Martin O'Grady

Thanks, Paul. Good morning everyone. Turning to the balance sheet, at the end of the quarter, the Company had $42 million of unrestricted cash, plus an additional $40 million of funds available under working capital and revolving credit facilities. Restricted cash was $13 million, mostly Porto Cupecoy receipts held in escrow.

Taking into account, the total debt of $844 million, outstanding working capital balances are $60 million, and the cash balance of $55 million. The net debt at the end of the quarter was $849 million.

On a trailing 12 month basis, the ratio of debt to EBITDA for real estate was 7.2 times. Pro forma after receiving $141 million from the equity offering, the ratio was 6.1 times.

The current portion of term debt at the end of the quarter was $237 million. This included a $108 million of loans drawn under revolving facilities that are rolled on a six monthly basis and (expire) in 2011 and 2012. The largest components here is the €60 million revolver that was rolled in April for six months and will be further rolled in October.

The current portion of debt also includes a $103 million relating the two years facilities on which we have been negotiating a covenant waiver more on this later.

Also taking accounts of these items, debt inclusive of capital leases is scheduled to mature as follows: In 2009, $43 million, 2010, $45 million, 2011, $530 million, 2012, $123 million. At the end of December approximately 40% of debt was fixed and the average cost of debt including margin was 4.2%.

Turning to cash flows for the quarter, net cash outflow from operations and our traditionally loss making first quarter was $11 million, which compares to a 1 million net outflow in first quarter of 2008.

Investments in Porto Cupecoy and some residual commitments on (Orleans) county in New York was 14 million, maintenance CapEx is 5 million and refurbishment CapEx at Hotel das Cataratas, Cipriani, Copacabana Palace and Grand Hotel Europe was 11 million.

Net cash provided by financing activities in the quarter was $9 million. And overall there was a net decrease of cash of $24 million.

I'd like now to turn to the two keys that investors have been focused over the last months liquidity and covenant. First liquidity.

Following the equity offering last week on a pro forma basis, our total cash availability is now $236 million. The short-to-medium term liquidity risk is therefore been lifted. That said, we will use a portion of the cash raised to pay down debt. And thus we will remain cautious and thoughtful, as we stride to maintain the right balance between debt repayment and liquidity preservation, as we move forward in our asset disposal program and the reduction and rescheduling of debt.

On covenants, as reported last quarter, we were looking at a potential covenant breach at the end of the first quarter and our two loans totaling a $103 million.

I’m pleased to report, that we have reached an agreements in principle with our lenders, and we are now working through the legal documentation phase.

When we pre-announced results last week, one media source reported that we had breached covenants at Hotel Ritz Madrid. In fact this is old news, that we reported last quarter. To reiterate this loan is to our 50% joint venture and is completely non-recourse to Orient-Express.

At year end, the outstanding loan is €78 million and in April, following a scheduled amortization payment was reduced to €74 million. To bring the loan back into loan to value from plants would require an additional payment of €5 million or 2.5 million from Orient-Express. We’re continuing discussions with the bank and hope to reach a resolution in the next few month.

Finally, I am pleased to report that in April, we closed a 30 million construction finance facility on Porto Cupecoy. This line of funding will enable us to meet our key stated objective of completing Porto Cupecoy at this year, as keeping the project cash neutral to the Company in 2009.

From 2010, after the project is completed and the debt is repaid from final installments and (lets go to money) on units that are already sold, we’ve been left with a valuable unencumbered asset from which we expect to allow free cash flow of $60 million to $85 million over the two year period.

I’ll now pass it back to Pippa.

Pippa Isbell

Thank you Martin, I’ll now hand back to the operator, so we can take your questions. in the interest of time, could I ask you to limit yourselves to three questions each at this stage. Many thanks.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Our first question comes through from the line of Joe Greff from JPMorgan. Please go ahead with your questions.

Joe Greff - JPMorgan

Good morning, good afternoon everyone.

Paul White

Good morning, Joe.

Joe Greff - JPMorgan

Martin, the debt maturities that you went through 2009 to 2012, that's no different than before the equity rates, right? That's not reflected at any planned debt maturities?

Martin O'Grady

Yeah. It includes the scheduled on the covenant way, we've been negotiating we have grew to pay off $10 million in June of this year, so it reflects that.

Joe Greff - JPMorgan

How does that change after you to about what you are paying down with the recent equity raise?

Martin O'Grady

While, we still, we can't really comment on that, yet, because, on the line this year

(Multiple Speaker)

Joe Greff - JPMorgan

Okay. I had to try. Thank you.

Martin O'Grady

No problem.

Joe Greff - JPMorgan

And then, Paul maybe you can help us understand the one European hotel where you have a deposit and the MoU and then the second property of an LOI. Maybe you can help us understand the valuation there in terms of value per key that would be helpful?

Paul White

Yeah I mean, the European property, I think on a value per key is around $400,000 a key on an EBITDA multiple basis, its certainly 20 times, sort of last year is about probably 15 to 16 times the peak EBITDA. So, as I have sort of alluded to, it’s a private buyer and I don't think you achieve these sort of deals by doing out to sort of brokers on a mass basis, this is a fairly opportunistic deal. The other deal that is that we don't have a deposit but we have an offer is one that is sort of is on Bora Bora which we have mentioned on many times before. Now there are no earnings coming out of Bora Bora and Bora Bora has 80 keys, so it could be in the 175 to 200,000 per key range rate.

Joe Greff - JPMorgan

And then when (record) timeline on that?

Paul White

Well the deadline for offer is actually for the next ground is the end of this week. Now I'm aware, but though I haven't seen any of the offers that we have. We are expecting nine of offers according to the broker I'm not sure what days these are going to come in on as yet. But we'll see how they come in and then we’ll take it from there. As Martin said what we've done is we've immediately or we are about to pay down about 10 million of debt reducing the debt level on the (wind that quotes) about 37 million.

Joe Greff - JPMorgan

Got you. And then my final question, Martin if you could just run over the plant maintenance and project CapEx for this year and if you can help us out in terms of how we should think about that for 2010 and 2011?

Martin O’Grady

Yeah, I mean we are still thinking that for the maintenance, CapEx we’ll be able to maintain the level of 2% of revenues, and we seem to be on target for doing that over the course of 2009. And certainly we feel that portfolio is in good enough shape to keep going through 2010 at that level.

The other project stuff Copacabana, the Grand Hotel and Cipriani they’ll be may be another 4 million or 5 million of payments coming through to finish of those projects and then for the deposit Cataratas there will be probably another $10 million or $12 million to finish up project offers this year.

Joe Greff - JPMorgan

Great, thanks guys.

Paul White

Yes, thanks Joe.

Operator

Thank you. Our next question comes through from the line of Nitin Bhalotia from Leo Fund Managers. Please go ahead.

Nitin Bhalotia - Leo Fund Managers

Yeah, hi, good morning everybody.

Paul White

Good morning Nitin.

Nitin Bhalotia - Leo Fund Managers

I have couple of questions, the first is probably, this is something that you’ve seen in one of cost but its coming in too many time so the litigation cost of 0.1515 in this quarter and the region cost as though. How long do you think this expense can be potentially incurred and is there a timeline for this litigation to end? That’s first question.

Paul White

Yeah, maybe I could ask Ned just to comment on the litigation question.

Ned Hetherington

What I would really rather not comment because we are in litigation. Thank you.

Nitin Bhalotia - Leo Fund Managers

Okay, I think there is some bit more details on cost cutting, its not very clear that you have the $17.9 billion that you have mentioned as cost saving in this quarter, is that incremental to 20 million to 22 million mentioned in the last call or?

Paul White

No, Nitin, it’s the way you should view the 22 million is, if you remember I referred to that as savings in fixed cost…

Nitin Bhalotia - Leo Fund Managers

Yeah.

Paul White

On an annualized basis so you could say I would be expecting to see that sort of coming in at 5 million per quarter. obviously there is some variable cost savings in there as well, I mean, a very simple example of a variable cost saving is, and our trains and cruises model, we can actually reduce the number of trips in a year which we are doing this year as you would expect to ensure that we run the trains full and that comes in as variable cost saving on the top. So, our general sort of (rolls system) is that for every dollar of top line revenue, we are expecting $0.50 of saving and then the $22.5 million or the $22 million that we refer to back in October, November comes on top of that, but that's a one (inaudible) saving. But as I said, as we are on a sustainable saving that we expect to, once is made, not to reappear.

Nitin Bhalotia - Leo Fund Managers

Okay. Thank you very much.

Paul White

Okay. Thanks, Nitin.

Operator

Thank you. We have no further questions currently in the queue. (Operator Instruction) Thank you. We have some further questions coming through the first of which, is from the line of Ross Haberman from Haberman Fund. Please go ahead.

Ross Haberman - Haberman Fund

Good morning gentlemen. How are you?

Paul White

Good morning. Fine, how are you?

Ross Haberman - Haberman Fund

I was wondering that you've seen -- what area would you say it’s a about your factors would be the strongest spend and the weakest as well.

Paul White

Yeah, its interesting, I mean, it seems to me at the moment what we are seeing is the further away from Europe that you guys are stronger, the stronger demand is are more experiential and creative product, particularly in South America, you heard what I said about the Bali in Brazil opening for Peru, Southeast Asia are doing pretty well. I mean, Mexico came through its high season very strongly, obviously it's been hit by the flu at the moment, but we are going into low season there. As far as the weakest I would say, going into European high season, we clearly have issues with the couple of properties that are more dominated by demand out of the UK which is Madeira and Spain combination of the strength of the Euro versus the Pound and in sort of economic terms probably we in Britain are six months to a year behind, what you will experience in the U.S. The most encouraging for me has been the domestic demand in the U.S. has picked up reasonably, strongly in the last sort of months, even in Q1, we only reported sort of 14%, 15% of and the American travel is from Europe are constant they are not showing a decline at the moment, so I think that as a source market the UK is probably the biggest issue that the company has. The strength is in those experiential products that are a long way from home.

Ross Haberman - Haberman Fund

And just one follow up question expectations for room prices over the summer, will they be down, you think another I don't know 10%, 20% or flat or what's your general expectations?

Paul White

Yeah. I mean obviously pricing we have in this cycle we have a huge amount more flexibilities than we've had in the past. There is a big difference between pricing of suite or junior suite in the high season. There is an entry level room in the low season or even in the shorter and high season. I think what you are going to see is that again our RevPAR will probably be dominated by movements in occupancy, but that doesn't mean that in certain areas of the world we are being very flexible in price. Obviously the corporate ledger mix will underpin price movement as well clearly one has to be much more flexible in the corporate market, properties that we have in places like Sydney. Madrid are happy to be much more flexible than our Italian hotels. So I think high season in Italy, probably the pricing may move by may be 10% or not much more, whereas in a corporate market like Sydney, on particular days of the week or days of the months, we may be moving prices by 25% to 30%.

Ross Haberman - Haberman Fund

Okay, thanks guys and that’s in local currency, correct?

Paul White

Yes, absolutely.

Ross Haberman - Haberman Fund

Okay, thank you.

Paul White

Okay, thanks Ross.

Operator

Thank you, our next question comes through from the line of Chris Woronka from Deutsche Bank. Please go ahead.

Chris Woronka - Deutsche Bank

Hey, hi. Good afternoon guys.

Unidentified Company Representative

Hi Chris.

Paul White

Hi Chris.

Chris Woronka - Deutsche Bank

Quick question on the trains and cruises, I know you bring the Road To Mandalay back in August, I know you took capacity out in the first quarter, how should we kind of think about that, and obviously you preserved a lot of margin by doing that. How should we think about that as you bring a little bit more of capacity back on?

Paul White

I think there is, probably a detailed modeling conversation you might have to have with Martin after this, because we have some currency related issues going through trains and cruises because of course a lot of the cost structure is in Euros and the revenue is split between essentially Sterling and U.S. dollars. We are, I have to say, I think having seen your latest model this morning, I don’t think you’ll view that far off, but it might be useful to use as a follow up with Martin on the specific elements of what goes in to trains and cruises. Peru, UK day trains, I think are holding up very well. The VSOE products itself I expect to be probably a couple of million net off of where we were last year.

Chris Woronka - Deutsche Bank

Okay, that’s great and just one another question on the overhead. How should we think about that, I know you've been implementing some of your cost reductions overtime and I know you have currency issues in there too just.

Paul White

I think the, what we reported in Q1 should end up as being close to a run rate on the central overhead. Obviously, there the balance of the fixed overheads in every single hotel property. And I think by now most of them have taken some of those fixed overheads up out as you get to that sort of 20 million number. So I think the, you are right to say that we do have people like myself and Martin and the people here in the head offices of Sterling overheads. So there could be movement as the Sterling moves against the dollar. But at the moment, I would say the run rate what we reported in Q1 should be the run rate for the balance of the year.

Chris Woronka - Deutsche Bank

Great. And then just one final one. Are there any prepayment penalties on either as Windsor Court or any of the other property that you've got?

Paul White

No.

Chris Woronka - Deutsche Bank

Okay.

Paul White

Okay. Thanks Chris.

Chris Woronka - Deutsche Bank

Thanks.

Operator

Thank you. That was our final question. I will now hand you back to your host to conclude today's conference call. Thank you.

Pippa Isbell

Many thanks to give your time everybody. Have a good day.

Operator

Ladies and gentlemen, thank you for joining today's conference. You may now replace your handset.

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