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Orient-Express Hotels Ltd. (NYSE:OEH)

Q2 2010 Earnings Call

August 4, 2010 10:30 AM ET

Executives

Pippa Isbell – Vice President of Corporate Communications

Paul M. White – President and Chief Executive Officer

Martin O'Grady – Chief Financial Officer

Analysts

Joe Grass – JPMorgan

Chris Woronka – Deutsche Bank

Operator:

Good day ladies and gentlemen and welcome to the Second Quarter 2010 Earnings Conference Call for Orient-Express Hotels. Today's conference is being recorded. At this time, I would like to turn the conference over to Pippa Isbell, Vice President of Corporate Communications for Orient Hotels, Express Hotels. Please go ahead.

Pippa Isbell

Thank you very much indeed operator. Good morning, ladies and gentlemen and our apologies to keeping you waiting. As the operator indicated, this is the second quarter earnings conference call for Orient-Express Hotels. We issued our news release last night and its 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. Second quarter total revenues excluding real estate up 13% to $146 million. Revenue from owned hotels up 15%, same stores RevPAR up 12% to local currency up 13% in U.S. dollars.

Adjusted EBITDA before real estate up $32.4 million up 22%.[audio gap]

Act of 1995. In the course of remarks due today by Orient-Express Hotels management and 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. So I have and will now turn the call over to Paul White, our CEO.

Paul M. White

Thanks, Ned. Good morning everyone. Inline with recent quarters, I think another quarter which demonstrate the steady progress by the industry and Orient-Express are making as we encounter economic recovery around the world. This is our second successive quarter double digit RevPAR growth and coupled with continue positive booking trends, means that 2010 is now beginning to exceed our own internal expectations. This despite some external issues outside of our areas of influence such as the political situation in Bangkok, floods in Peru, volcanic ash cloud and airline strikes in Europe.

Despite these being major press stories and as I reported on the last quarter, having some impact on our second quarter results cumulatively this was washed out as the bounce back was quite strong in all areas. Overall, the results that Pippa summarized earlier on the call along with the excellent progress that Martin and his team have made on the refinancing of the company's long-term debt means that [audio gap] first time in recent years, I think I can summarized the quarter more towards being good rather then just solid. Martin will give more color on the refinancing and debt issues later in the call.

In my own discussions with investors its clear that the main concern remained a medium term outlook and in particular the situation on outside of the Atlantic over here in Europe. Just to bring you first, we'll ride up today we have our July numbers just in. RevPAR in July actually grew by 19% and interestingly over 80% of our business is around the world reported growth.

So let's drilled down into the second quarter numbers starting with Europe. Where second quarter same store RevPAR was up 1% and same stores EBITDA grew 4 to 17.8 million. RevPAR gains in U.K., Russia and France, all reporting greater than 15% growth in local currency was somewhat offset by Spain and Portugal both down by more than 10%. Italy was slightly down in the quarter.

The RevPAR movement was driven by higher occupancies, as more aggressive pricing strategies resulting a 7% increase in volumes on a same-store basis. It should noted that quarter two really is a shoulder season in Europe and our strategy in the low and shoulder seasons it designed around volume growth.

July however rate presents high season and the results have showed a mark difference. Revenue is up more than 10% in Europe in July with Italy the real highlight. We are pleased to get the two Sicilian properties open on schedule of the end of May, most the early weeks of slow, business and importantly average rate is on the rise.

A few other positive signs to [inaudible] second best ever year ever month sorry at July reporting 94 % occupancy at an average room mate of $1500 but the RevPAR in U.S $1,419. Business in Italy is coming from the U.S up 28% in Venice and up 60% in Rebelo and form South America and encouragingly from Italy itself.

Those of you familiar with Orient-Express story in recent years know that we strongly believe that building domestic business is key to building sustainable demand in the future. Booking as of the end of June on the same-store basis is 17% ahead of this time last year with Italy 18% ahead. Only Reid to Madeira is trucking behind last years pace. On a 12 months basis bookings are 4% ahead.

Moving to North America, RevPAR for the quarter was up 16% dominates by an excellent 28% growth adjust in place. Domestic North America overall showed 21% growth with Mexico and Caribbean slightly down, as with Europe showed season demand volume was the main driver. Average rate was essentially flat for the quarter.

EBITDA in North America grew by 25% in the quarter good conversion. July revenues were up 22% with encouraging sings for Mexico in the Caribbean. Moromo was up 20% and [inaudible] up 29% on prior year. The outlook for North American properly is certainly looking strong. Quarter 3 bookings at 32% ahead of the same period in 2009 with quarter 4 up 7%. On a forward 12 months basis bookings are 23% up, Charleston Place is up 18%.

Moving on to the rest of the world, RevPAR is at healthy 34% in the local currency, with South America up 32%, Asia 11% and Australia 38%. Again all driven by occupancy. South Africa however was up over 60% due obviously to the impact of the World Cup, here there was some rate growth as well.

EBITDA in the region grew 80% to 6.3 million for the quarter, next years comps may be a much tougher but we will have the impact of fully open an operation Hotel das Cataratas in 2011. In July revenue was up 40% with every region within rest of the world contributing to that growth.

Looking ahead booking for the third quarter which is actually the low season in most of the rest of the world is 21% ahead of this time last year and we are 5% ahead on a forward 12 months basis. Overall owned hotels RevPAR grew 13% to 12% in local currency with EBITDA are up 18%. Good growth in Madrid coupled with the stabilization of results in Peru's, so we're seeing some growth 78% in the quarter and on the restaurant front 21 club showed similar growth in the quarter. So overall our bookings at 22% up for quarter three and 10% up on a full 12 months basis same store which basically excludes booking specifically in Cataratas.

Finally Trains and Cruises, with revenues in EBITDA for the quarter was flat. with the results in Peru being offset by those in DSO here the U.K. day trends. Bookings for the third quarter on a revenue basis and as of 31st of July was sitting 16% ahead and quarter four revenues currently sits 32% ahead of 2009. July results for the trains actually were 5% up.

To sum up the quarter which includes as I said earlier the shoulder season months in the Northern Hemisphere we targeted volume increases, pricing was pretty aggressive and the result was good revenue growth but all occupancy good driven. We believe this trend will continue to the rest of 2010 and indeed through the shoulder seasons at the beginning of 2011 and it will only be in the high season in 2011 when you should expect to see it start to really be able to push on rate again.

Moving on to our key medium firms strategic actions all aimed at reducing our long-term debt. During the quarter we closed on the sale of Lackawanna [inaudible] bringing the total race from assets disposal to around $110 million. That’s four non core assets sold all at very attractive multiples of a peak not just the current earnings but of a peak earnings which I believe underpins the multiples to true luxury assets trade out. We are in discussions on the sale of two further assets with our aim to release a 150 million two assets sales by the end of 2011. In this area, therefore I think we are well on track.

On real estate sales, as I said on the last call, the main areas focused at the moment is Cupecoy which was opened earlier this year. The project is actually nearing final completion. The final 24 units are being fitted out at the moment and will be complete by the end of October with the last piece in the jigsaw being the Tennis Courts which will be laid when the contractor is moved offside to see final-final completion in November.

We have now sold a 105 units leaving [inaudible] to sell of a 105, 70 are completed, that means fully paid for – and many of the owners now moved in. And we've now repaid all the debt on this property. So, it's completely (unclear)-incumbent. Sales to-date have been at around to $400 per square foot mark. We have concluded that we should maintain this price levels as the product will be without doubt the best on the island by a long way and we need to be patient and trust in market recovery and a strong 2011 plan sales campaign. We expect the remaining units to generate 55 to 60 million of free cash.

So in closing, as we said, we're almost three quarters away through the year. The world is clearly a more settle place than it was a year ago. Business trends are returning to more normal pattern and visibility or at least bookings space seems to be more consistent. I'm encouraged to see the U.S. Traveler returning in good numbers and we are seeing the first signs of the recovery in the U.K. A key market for us particularly for Spain, Portugal and Italy and indeed La Residence has showed 15% growth in the months of July and that was all out of the U.K. the market.

The company remains focus on deleveraging as its number one priority with EBITDA growth, assets sales on the sale of develop real estate been the key components in the strategy. I'll now hand over to Martin.

Martin O'Grady

Thank you Paul, good morning every. At the end of the quarter the company had $113 million of unrestricted cash plus and additional $31 million of fund available under working capital and revolving credit facilities, restricted cash was $16 million. Total term debt at June 30 was $762 million and outstanding working capital facilities was 8 million. Taking the account of our cash balance of $129 million net debt at the end of the quarter was $641 million. On a trailing 12 months basis the ratio of net debt to adjusted EBITDA pre real estate was 8.4 times which is down from 9.9 times last quarter. Our debt service coverage ratio was around 2.4 times. Our debt – our term debt maturity schedule taking accounts under $1 million of revolver that mature in 2011 and 2012 is now as follows, 2010 based on this year $14 million, 2011 $486 million, 2012 135 million after 2012 $127 million. At the end of June the interest costs on 63% of our debt was fixed and the average cost of debt including margin was 3.5%.

And with the cash flows for the quarter, net cash from operations excluding real estate was $15 million. There was $16 million of CapEx in the quarter including $6 million from [inaudible]. In addition to this we invested $4 million in Hotel das Cataratas.

Net debt repayments in the quarter were $50 million including $27 million of typical debt’s and overall there was a net reduction and unrestricted cash of $38 million. Regarding Cuzco receipt of $30 million schedule to receive from customers closing and sold units, $9 million have been received before the end of the quarter, $10 million is been received since the end of the quarter and we expect to receive the balance of a 11 million units as these units close over the next few months.

The debt is now been fully discharged, so as and when further units sold the cash flows deeds will flow directly to Orient express free and clear of any debts. The next tax charge in the quarter is $7 million compared to net tax charge last year for $11 million, cash tax in the quarter was 3 million of fully cash tax is expected to be in the range of 12 to $14 million and from openings I would guide that the fact $7 million balance of cash tax with to pay should spend equally over the next two quarters.

We expect the full year tax charge to be in the range 22 to 24 million and again from marketing I would guide as a 15 to $17 million balance of the tax charge beside 2/3 in Q3 and 1/3 in Q4. With that I am pleased to report that we have made great progress on refinancing debt to the full view in 2011. We have now received full approval from bank credit committees for the four largest loans that material next year.

Starting with the biggest we have received approval for a €115 million loan for the four Italian hotels that is excluding Cuzco which has debt maturing in 2013. This will be a five year loan without transition of €3.75 per year and will carry a margin of 2.5% over [inaudible]

Secondly we have a package raised and have received the approval for a three year loan of €38 million with amortization of €2 million per year and the margin of 2.75% over year [inaudible] These two loans complete the refinancing of the outstanding €239 European facilities rest that will be paid down by €51 million or $68 million.

Thus we have received approval for a $75 million loan on Charleston place to replace the $67 million of existing debt. This will be a three year loan with the two one year extension as amortization of $600000 per year encourage a margin of 3.5% over LIBOR with fill. This loan will be non re-coursed OEH

Finally we have received approval for a $44 million loan I have to refinance our US loan [inaudible] manually this is a three year deal with amortization of $4.5 million per year a 3.5% margin of LIBOR and again with no fill.

Taking together these full loans will refinance 86% of the debt being replaced which is nicely ahead of our 75% target. Also these loans really count for 88% of the loans maturing in 2011. There are now only two loans maturing in 2011 that we still need to agree terms on, $19 million outstanding at La Samanna and €30 million outstanding on La Residencia.

I will now pass it over to Pippa.

Pippa Isbell

Thank you Martin. I will now hand back to the operator for any of your questions. In the interest of time please limit yourself initially to each. Thank you very much operator?

Question-and-Answer Session

Operator: Thank you. (Operators Instructions) We will now take our first question from Joe Grass of JPMorgan. Please go ahead

Joe Grass – JPMorgan

Good afternoon everyone how are you?

Martin O'Grady

Hi Joe and good afternoon.

Joe Grass – JPMorgan

With respect to the two used to selling [ph] assets and that’s what is pricing now versus the year ago, obviously when you selling?

Martin O'Grady

It remains average right. Yeah well we started of I think I looked to the sell [ph] year on that are presented to I think we were sharing [inaudible] with that $142 historically up to now [ph] we started of with not quiet double [inaudible] about 330 at the Saint Andre’s sort [ph] of about 290 [inaudible] it’s one month and it was fairly slow start to the month but we are well in line [ph] with expectation on the right [ph] side just a little touch behind on the occupied [inaudible] of the side.

Joe Grass – JPMorgan

Okay great and then how do you think about CapEx capital investment over the next two quarter and may be in to the next year and then obviously with over encouraging bookings, trends that [inaudible] is there capital investment opportunity that you are working at that may be you are considering more seriously because of the improvement and booking trends.

Martin O'Grady

Well I mean lets not get ahead of our [inaudible] I mean yeah I am sure there are few general manager that in the field may be even listening this call that I think getting excited about CapEX opportunities but so we set the we want the very strict amount with spending we are focusing any expenditure that we do towards insuring the brand standards as maintained or improved.

The portfolio overall is in very good condition at the moment and where we will look it investing next year all going to be in properties where we thing we can get very good returns for example Brazil has perform spectacularly this year I thing the Copacabana Palace is trending to ordinary $20 million of EBITDA which is an incredible performance I mean you will remember the trans wedding used to trade it for 12 and 13 million and we though that was good and yes got an opportunity that to upgrade some of the rooms particularly with the Olympics in the word cup coming up there so we know we’ll get a return but no significant increases about the current sort of run rate on CapEX and if business does increase then yes we will start looking at areas where we can may be add rooms or if you like be able to get back to the nice [inaudible] product projects but at the movement we’re very much focus on need to do and keeping it with in the sort of range with been in the last couple of years.

Paul White

Great thank you.

Operator: (Operator Instructions) We now moved to Amanda Bryant from [inaudible] for our next question please go ahead.

Unidentified Analyst

Great thank you good afternoon

Martin O'Grady

Good afternoon.

Unidentified Analyst

Hello give us center of how long you should typical booking window across hotel portfolio and how may that compare with the average booking window in your trains cruises segment and then if you look at you’re the [Ph] link of your booking window today and how you that compare verses that where you work three years ago.

Martin O'Grady

I mean the train and cruises booking window is a lot longer than the hotels booking window [inaudible] most of these products once in a life time products and people will be booking them almost a year in advance I mean there numbers that I gave out there on trains and cruises really haven’t moves since what I was saying is a very even on the November cold and the August cold last year so people do book a long way and a head across the hotels you know you got one extreme of the Copacabana Palace where it’s like the averages full five days [inaudible] for booking Italy tends to be a lot longer but just on our review [inaudible] yesterday [inaudible] telling us that he had a 40 rooms over to [inaudible] eight night six room booking coming for the [inaudible] at very short notice typically we have still I mean I would say on average across the group probably the lead time is about half what it was two year ago but is sounding to push back but the diverts you know its very diverts across the portfolio particularly between some of the stronger ledger products and some of the business [inaudible] products.

Unidentified Analyst

Okay and if you could touch on quickly what exactly drove the improvement at the hotel [inaudible] in quarter.

Martin O'Grady

I thing I mean I shall I thing to be use to be fair [inaudible] recovery in Madril itself I thing the good thing [inaudible] of Madril is there is very few decent hotels in Madrid I mean the their strong values to entry but I thing Madrid had a fairly good moment the amount is reminding me of some thing and I should know that being a football phonetic in the room we also have the champion league final.

Unidentified Analyst

You say I am not a football fan

Martin O'Grady

Just there marine actually it was the manager of inter Milan stayed with his whole family for a week afterwards before taking on the job as the manager of Real Madrid so I think that probably helps a little bit as well.

Martin O'Grady

Well thank you very much

Paul White

Okay. Thanks Amanda

Operator: Thank you. (Operator Instructions) We now move to Chris Woronka of Deutsche Bank. Please go ahead.

Chris Woronka – Deutsche Bank

Hey Good afternoon guys

Paul White

Hi Chris

Chris Woronka – Deutsche Bank

Can you just remind us again how the FX works on the St Petersburg hotel with the you think you have couple different currencies there and just now that we didn’t have the effects benefit being quite a margin just to secure minus on that? Thanks.

Paul White

Yeah. I do think because the rebellion has been fairly stable, may be in the last quarter and the firm is really here we go to see the cumulative effect becomes less and less. But, essentially, I think most of the pricing and on the room side is in hard currency which is why there is you know, the river [ph] does move a bit like to cope the divine on palace that can be a positive or negative moving. I think it was negligible in the quarter. And I think, there the currencies are really moving in the quarter. The way we are after that.

Chris Woronka – Deutsche Bank

Right. Okay, great. And then can you remind us on the fourth quarter. You know, what your customer mixed is there and a step booking window differs dramatically that it does kind of for the summer European business?

Paul White

For Russia. Yeah. I mean, fourth quarter is going in to sort of a the lowest season. I'm just looking at the book to build.

Chris Woronka – Deutsche Bank

Yeah. Actually more to be -- more for kind of the rest of the world, the South Africa and Caribbean?

Paul White

Yeah. I mean, the fourth, obviously the third quarter is a high season quarter. I mean, the fourth quarter tends to sort of be the back end showed decision and going into a part from sort of real and cape town going into low season. So, I mean, bookings overall at the moment for the fourth quarter, I've got a -- I think just 2% of them last year.

Chris Woronka – Deutsche Bank

Okay, great. And anymore thoughts on kind of possibility of the 21 even of the expensed in New York or the expanse of that is a more of a larger brand?

Paul White

Yeah. I know I'm going to get grilled on this in New York on Monday and Tuesday, the various events and I'm going to be attending because its sort of where we will be beware. But a lot of thought, a lot of talk, a lot of discussions with people but nothing really the time in a position to comment on at the moment, Christ.

Chris Woronka – Deutsche Bank

Okay. Fair enough. Thanks, guys.

Paul White

Okay. Thanks.

Operator (Operator Instructions)

Pippa Isbell

Okay. Well, thank you very much indeed ladies and gentlemen. And there are no further questions. Have a good day.

Paul White

Okay. Just before we go, I got a hints on my call. We will be in New York on Monday and Tuesday. In fact, Tuesday we celebrate 10 years with a public company. So, I hope to see most of the -- our investors the various events in New York on Monday and Tuesday. Thanks very much.

Pippa Isbell

Thanks, good bye.

Operator: Thank you ladies and gentlemen. That will now conclude today's call. You may now disconnect.

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