Orient-Express Hotels Q4 2007 Earnings Call Transcript

Orient-Express Hotels

Q4 2007 Earnings Call

February 26, 2008 10:30 am ET

Executives

Pippa Isbell - Vice President Corporate Communications

Edwin S. Hetherington - Vice President, General Counsel and Secretary

Paul White - President and Chief Executive Officer

Analysts

Michael Sketta - Ingall

Sujata Goel - CNBC

Benjamin Pass - GLG

Lewis Fark - Chesapeake Partners

Kevin Miller - Bear Stearns

[Mike Donigar – CR Trends]

Presentation

Operator

Thank you for standing by and welcome to the 2007 fourth quarter earnings call for Orient-Express Hotels. (Operator Instructions) I would now like to hand the conference over to your first speaker today, Pippa Isbell. Please go ahead.

Pippa Isbell

Good morning, ladies and gentlemen, this is Pippa Isbell, I am Vice President of Corporate Communications for Orient-Express Hotels and as the operator indicated, this is the fourth quarter earnings call for Orient-Express Hotels.

Last night in New York we issued our news release and it is available on our website at orient-express.com as well on the SEC’s website. For any of you who have not yet seen it, the highlights are as follows:

Fourth quarter total revenues of $151.2 million up 12% over prior year.

Fourth quarter net earnings from continuing operations of $10.2 million, up 53% over prior year.

Earnings per share from continuing operations of $0.24, adjusted EPS of $0.25;

Worldwide same-store RevPAR up 10% in local currency, 14% in US dollars.

We completed the acquisition of land to develop the new 21 Hotel in New York and we completed the takeover of Hotel das Cataratas at Iguacu Falls in Brazil.

With me on the call today are Jim Hurlock, Chairman of Orient-Express Hotels and Paul White, our President and Chief Executive Officer.

At this time I would like to hand over to Ned Hetherington, Company Secretary for Orient-Express Hotels who has some housekeeping items to cover.

Edwin S. Hetherington

Yes, thank you, Pippa. What I want to deal with is our usual cautionary statement related to the Private Securities Litigation Reform Act of 1995. In the course of remarks made today by Orient-Express Hotels management and in answering your questions they may make forward-looking statements concerning Orient-Express Hotels such as it’s earnings outlook, future investment plans, and other matters and 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’d now like to turn the call over to Paul White, the CEO of Orient-Express Hotels.

Paul White

Thank you Ned and good morning, everybody. Let me start by giving you an overview of the key events for the company in the fourth quarter. During the quarter we conducted a strategic review encompassing every proxy in Orient-Express Hotel’s portfolio. Out of this came our go forward plan, which was presented to investors back in November 2007. I will comment on some of the individual elements of this review as we speak about regional performance. The key parts of the strategy presented to investors in November were as follows:

The first element of our strategy was to focus on our portfolio of 50 or so properties and on maximizing revenue opportunities in all areas of operations rather than the traditional industry focus on rooms revenue or RevPAR, thereby emphasizing the opportunities that we as a high-end luxury travel company have to enhance revenues. This decision is supported by the results of the quarter with total hotels’ revenue up 19%, 9 percentage points above same store RevPAR, which was up 10%.

The second area of our strategy moving forward we spoke about was acquisition opportunities. We are seeing a number of acquisition opportunities hit our radar, both in the Americas, in Europe and also in Asia. We have a dedicated team of professionals working diligently on turning some of these opportunities into reality. We are actively sourcing opportunities and hope to make some positive announcements in the coming months. Our development pipeline including properties in Peru, Brazil, California, and of course New York is strong with our Peruvian property, Las Casitas del Colca opening in a matter of weeks.

The third area we are looking at with fresh eyes is our real estate program. The key focus has to be on selling. In November this process was started by changing the focus of our sales team’s down in St. Martin with the result that after nine months of no movement sales pace has picked up and so far this month we have sold a further six units with another 11 units under advanced discussions.

The final area discussed in November was how to leverage off of our brands. We owned some 40 brands across the globe, many of which are household names. We intend to extend the outreach of some of these bands with the first examples being our recent investments announced in New York and also in Brazil.

In November 2007 we announced purchase of the Donnell Library site, which backs onto the 21 Club. This is an exciting project for us for a number of reasons. The project alone is economically compelling, but the impact of this project on OEH will be broader.

In St. Petersburg, Russia our investment not only yielded in excess of $20 million of EBITDA this year, but has resulted in an understanding of our brand from the Russian markets perspective and we saw visitors from Russia more than double in 2007. We expect the New York Hotel to have a similar impact.

On the project itself, this is the first example of us leveraging off an existing brand. The use of The 21 brand will give the hotel identity and traction in the New York marketplace. Finally the fact that this property will join to the existing 21 Club means that this is a hotel being built around an already very successful food and beverage concept. We are in the final steps of appointing architects and interior designers and expect to be able to make some formal statements on that front in the next few weeks.

I would now like to talk about the management team. We have completed a worldwide restructure of operational management with importantly key responsibilities being pushed to a reasonable level where the expertise lies. What do I mean by this? We need to focus on consistency. We have nine regional managing directors reporting to one person responsible for operations across the brands. As a result, we now have a healthy mix of experience and new blood, the future of our company. We have employed new resources in acquisitions and development and in the real estate.

The final piece in the jigsaw is our new CFO, Martin O’Grady. Martin brings a healthy mix of industry experience and has worked both in the public and private domains. He’ll get to know you over the coming months starting with our trip to New York tomorrow.

Moving on to our results. First with regard to our strategic reviews, I think it was somewhat inevitable that when reviewing some 50 operations one or two would be identified as non-core or ones that do not fit the long-term objectives of the company. This was clearly the case with Bora Bora Lagoon Resort, which has seen a proliferation of competition in a destination which has opened its door to larger scale tourism, and as a result the destination has lost its cache. Due to a strong euro and our entry cost, we see a differential of $50 million between book and expected resale value and thus on the U.S. GAAP accounting took the decision to impair the asset.

Looking at the performance of the regions, I will start with Europe. We have a good end to a good year in Europe, fourth quarter is low season in most of the properties; same-store RevPAR grew 12% in local currency, 21% in US dollars. In Italy, same-store RevPAR grew 28% in local currency to just short of $725. For the year RevPAR in Italy grew 22% to just over $1,100. The renovation works we talked about in the last quarter the Cipriani which will see 16 rooms upgraded will be complete in time for the scheduled opening in March.

Results for the Grand Hotel were also good with RevPAR growing 11% in the quarter, and EBITDA growing at 18%. In Madrid, we had an excellent end to the year with OEH earnings recorded on the management interests up 340% to $1.3 million. The hotel’s refurbishment will commence in the third quarter subject to final planning approvals. This is a key issue in this property and we will only close this property when we have absolute certainty of reopening.

Bookings in Europe are tracking at 17% ahead for the first quarter and 5% ahead for the rolling 12 months. I would be guided more by the latter number than the former. In Italy it is early in the booking season; the bookings pace to the high season is looking strong. It is important to understand that while we have some properties which have occupancy upside, the growth will be primarily rate driven; increased bookings will translate into increased rate as management use demands to further push rate.

In North America, the fourth quarter was challenging one. Overall same-store RevPAR was flat as was total revenue. The positive signs detected a couple of months ago in New Orleans are now turning into reality with the property recording an EBITDAR of over $1 million for the quarter and forward bookings tracking 14% ahead for the year. The company has moved one of its more experienced general managers to the property and we’ll begin a rolling program of investment which will see rooms and food and beverage offerings substantially improved over the next three years.

Elsewhere in the North American portfolio, the recovery at Maroma post Hurricane Wilma continues with RevPAR up 24% in the quarter. EBITDA was behind due to the fact that in 2006 we wrapped up the business interruption insurance resulting in an insurance credit of $2.7 million. Overall in the U.S. bookings are tracking 10% ahead for the next 12 months with the first quarter tracking 12% ahead.

Turning to the rest of the world, the region showed a 12% RevPAR growth in local currency, that’s 15% in US dollars. In South Africa, EBITDA grew 10% for the quarter and 28% for the year. All of our properties performed well and that has been a good year for the region. With the new spa completed at Mount Nelson, we are now turning our attention to putting a boutique spa facility into the Westcliffe in Johannesburg.

In Botswana, we had our best year since the acquisition and are exploring some exciting expansion opportunities in this region. In Asia, the portfolio performed well, the results were impacted by the effects of the conflicts in Burma; backing these out EBITDA would have grown by 8%. In Brazil, the Copacabana Palace saw RevPAR grow at 12% resulting in EBITDA growth of 5%, the differential caused by the movement in the real. At Cataratas, we are well ahead in planning our renovations, which are due to commence shortly.

Turning to bookings for the rest of the world, these are currently tracking 6% ahead for the coming 12 months with the rest of the world essentially now moving into the low season period.

Moving on to real estate. We reported approximately $5 million of revenue for the quarter and all of this was from our Cupecoy development in St. Martin. As outlined in the press release this resulted in profit recognitions of $1.5 million. On the sales side, since restructuring the sales approach, condo sales have seen positive movement with six condos being sold this year and a further 11 under consideration keeping us in line with our target of 20 sales this season. On the French site the first luxury villa will be completed in July, and we are starting an active marketing process for the seven villas currently.

Moving on to trains and cruises, this has been a phenomenal year for the trains and cruises business. In the quarter EBITDA grew by 5%, this in spite of our Burma operations recording a loss of $0.4 million, $1.5 million below last year’s recorded profit of $1.1 million. All other aspects of trains and cruises portfolio showed good growth, which continues to be driven by strong UK demand. The UK trains including the SOE showed a 10% EBITDA growth for the quarter. For the full year, EBITDA for the portfolio grew 39% in what was a stellar year for this business. Bookings which here are on a revenue basis are tracking 11% ahead of the same time in 2007. This again shows that people are booking earlier.

Moving on to financial matters. Firstly, a comment on our cash position. As of the 31st of December 2007, we had cash of $94.4 million which compares with $79.3 million at the same time in 2006. In addition to this, we had cash availability of $72.4 million comprising undrawn revolving credit facilities in Europe, US, and UK. In addition, we have undrawn construction finance of $60 million in relation to Cupecoy bringing our total cash availability to $226.8 million.

In the current climate I think it’s important to note that the company has only one piece of debt due for refinancing in 2008 we expect this to be completed in April. At the end of the quarter we had long-term debt of $786.4 million or net of cash $692 million. As of December 31, 2006 our long-term debt was $669 million or net of cash $636 million. Our debt to EBITDA ratio at the end of the quarter was 4.5, down from 4.8 from the 31st of December 2006.

Turning to cash flow for the year. Cash from operations was $50.2 million, that’s $13.6 million ahead of the same period in 2006, primarily performance-linked. Our capital expenditure for the year inclusive of maintenance capital expenditure was $103.9 million, which included $12 million for the refurbishment of the Grand Hotel Europe, $11.9 million for our works on our Italian properties and $10 million relating to works on Allen Campton. We had investments of $21.9 millions relating to the acquisitions of the Royal Scotsman, Afloat in France, our investment in [Buzius] and the buyout of minority interest in Laos. We repaid $147 million worth of term debt and drew a $177 million of new term debt. We paid dividends of $4 million resulting in net cash flow of $15.4 million.

Moving on to tax, our effective tax rate for the year was 29%. Our FIN 48 provision now sits at $24 million, this compares with $28 million at the end of 2006. We managed this provision in the knowledge that should judgments made historically in the company’s tax planning either be upheld or challenged the provision will continue to reduce significantly over the next two years. Management continues to be focused on our cash tax position, which in 2007 was below 20%.

In November 2007 we held investor meetings in New York, Boston and San Francisco and gave outline guidance for 2008. This guidance remains unchanged. We are expecting RevPAR growth worldwide of 6% to 8% with EBITDA pre real estate to be in the $160 million to $170 million range. On real estate, we are expecting EBITDA to be in the $10 million to $20 million range.

With the I’ll hand it back to Pippa.

Pippa Isbell

Thank you, Paul. I’ll now hand back to the operator so we can take your questions. In the interest of time, could I please ask you to limit yourself to just three questions each this morning. Thank you operator.

Question-and-Answer Session

Operator

Your first question comes from Michael Sketta - Ingall.

Michael Sketta - Ingall

Can you go over the European bookings that you’re seeing?

Paul White

Yes, certainly. Our European bookings for the year are sitting at 17% ahead. But what I said was it’s quite early in the bookings season still for the quarter, if I look for the year as a whole, that is 5% ahead.

Michael Sketta - Ingall

And is that in dollar terms or local currency?

Paul White

No, that’s in actual bookings.

Michael Sketta - Ingall

Actual bookings, okay

Paul White

What I do expect to happen is that this would translate into revenue growth from rate rather than revenue growth from volume. As the booking season goes through we’ll see that that will slow and we’ll be able to use new management techniques, as we did this year. Remember this year most of our growth, most of our RevPAR performance was rate rather than occupancy, related which you’d expect to this point in the cycle.

Operator

Your next question comes from Sujata Goel - CNBC.

Sujata Goel - CNBC

I understand that Taj Hotels in India has made a bid to buy out some part of your share holding. I’d like to know what is the status on that?

Paul White

Well, first of all they haven’t made a bid to buy the company. They approached the company to form a strategic alliance with the company which the company considered and went back and concluded it was not in their interest. Really this is a story that relates back to the latter half of last year and since then there has been no communication between the companies.

Sujata Goel - CNBC

As a follow-up question to that are you still considering a proposal from them or is that chapter closed as far as you are concerned? Is there anything in the proposal that you would be able to considered at a later date?

Paul White

I think from our point of view, as I said I mean we haven’t spoken to these people, the Indian Hotels Company Limited, since October of last year. There was a rather bizarre letter that was filed with the SEC in December. But, no we had no communication and I think from our point of view, we are focused on continuing to run the business focusing on our strategic objectives. I’m not in a position to say whether from their point of view the matter is closed certainly we are just focused on moving forward with our go-forward plan.

Sujata Goel - CNBC

My last question would be that you’re not going to look at any kind of alliance then or is there any kind of proposal that you would like to consider?

Paul White

Edwin S. Hetherington

There isn’t.

Operator

Your next question comes from Benjamin Pass - GLG.

Benjamin Pass - GLG

Paul, over the last four months you have made it very clear to us that the board would not stand in the way of a proposal that created shareholder value. And you really have gone out of your way to discuss every question that the holders have asked and you referenced the B shares, it’s written in research, the Citigroup not that everyone looks at from the meeting in December.

But despite all of this, you’ve really gone out of your way to make this clear, the investment community still seems to be confused. It seems that this is a very good time to clear up one very simple question -- and let me be very clear, this is one question and that’s it.

If a valid, attractive and definitive proposal to acquire the A shares is made, will the company’s board and the board of the B shares put this proposal to holders of the A shares for a vote? Simple as that.

Paul White

Simple as that Ben, and you are directing the question at me? I will answer in the only way that I can answer it, Ben, and the way that I think you’d expect me to answer it is that we do not have a definitive bid and at the point in time when we get a definitive bid that is when these questions will be addressed. At the moment while it’s all hypothetical speculation, we are not going to go any further.

Jim, I don’t know if you want to add anything to that.

James Hurlock

No, I don’t have much to add except to say that we can reply to speculative inquiries.

Benjamin Pass - GLG

Jim, very simply -- I appreciate that Paul -- one other things that you’ve gone out of your way to say is that the board of directors will not stand in the way of a value-creating offer to the shareholders and that the A shareholders being economic owners of the –

Paul White

What I’ve gone out of my way to say to investors and analysts alike is that the board understands what its duties are and will conduct itself in accordance with those duties and obviously the company’s bylaws and really that’s what the main takeaway of these conversations that we’ve had many times over the last few months has to be. The bottom line is that this company is not under offer at the moment.

Benjamin Pass - GLG

Understood.

Paul White

The speculation is continually being fuelled by certain outside events and certain press events, but as the last question from the press on the line indicated, it seems that the whole issue with Tatar and Taj is one that is starting to die now and we’ve got to move on. We’ve got to focus on building this company. A company that over the last four years has increased its profitability and its EBITDA by 250% and from your point of view its share price by over 350% and that’s what my management team are focused on. The Board of Directors are allowing as they’ve done during those four years this management team to focus on that and that’s really how we’re going to build shareholder value going forward.

Benjamin Pass - GLG

Well quite honestly Paul, we’re very excited about the opportunity and I fully appreciate that no formal offer has been made and you did that, clarified the point. I only ask, however, as to whether or not the A shares would be able to express their views and vote their shares if an offer was made. In the Citigroup note that we mentioned last week referenced to December, point 1 and 2 of that coming out of that meeting in London was that if an offer was made the board would hire counsel and its financial advisors that we would expect it would under normal course. Secondly the question is the Board could allow shareholders to vote on that offer, and that’s the thing we want to make clear there and get an answer to.

Paul White

Obviously that is as it was pointed out of that lunch by Citigroup -- and she is probably on the line – made their own conclusion on that is that is a decision that will be made at the relevant time and speculating on it in advance I think is only going to cause even more confusion in the marketplace.

Benjamin Pass - GLG

I agree with that point.

Operator

Your next question comes from Lewis Fark - Chesapeake Partners.

Lewis Fark - Chesapeake Partners

Moving forward, let the shareholders decide, the A shareholders decide, and they avoided the question by saying that’s theoretical because no such offer is on the table right now.

Paul White

Sorry Lewis, I missed the first sentence. Could you just back track?

Lewis Fark - Chesapeake Partners

I think that this is a Board that well understands their duties and their obligations and they will fulfill them, but he was not definitive.

Paul White

Sorry Lewis, I do apologize. We missed the first part of your question. Could you just back track and repeat it please?

Lewis Fark - Chesapeake Partners

I’m sorry Paul. The question is, in Europe you gave the rolling 12 months booking part. Can you give the like figures for the US and rest of the world?

Paul White

So in the US the bookings are tracking 10% ahead for the next 12 months and 12% ahead for the first quarter.

Lewis Fark - Chesapeake Partners

But what was the rolling 12 months which was the corresponding number to 5% in Europe?

Paul White

10%. So on a rolling 12-month basis we are 10% up. And then in the rest of the world we are 6% up on the rolling 12-month basis.

Operator

Your next question comes from Kevin Miller - Bear Stearns.

Kevin Miller - Bear Stearns

I was hoping you could comment on what sort of visibility you have into your North American business for the first quarter for the rest of ’08? You had previously guided 5% to 7% RevPAR growth in that region. Is it still the same?

Secondly what EBITDA loss or EPS loss you had at Bora Bora in the fourth quarter and for the full year of ’07?

Lastly what your CapEx plans are for ‘08 and ’09, if you could tell us some details about the projects?

Paul White

Yes, absolutely. I get your first question because I read Intercontinental is dropping their guidance on the US today as well. I think Kevin you know the company quite well and obviously a big part of our North American portfolio is New Orleans. So the fact that we’re coming off an unfortunate situation in New Orleans means that I still have confidence that we’ll hit that 5% to 7% range, because that particular hotel has fairly low star points.

As for as if I can jump on to your third question which was the CapEx plans for this year. The key areas of capital investment are in the completion of the projects in Santa Barbara, El Encanto; and Cataratas in Brazil. Overall I think maintenance CapEx we will keep to the same amount between $20 million to $25 million. if you factor in some of the other projects that we’re looking at, another phase of rooms albeit a smaller number at the Grand Hotel, works on spas in places like the Westcliffe, I think an all-out figure again of around $100 million is the right number to pick on.

Now finally the EPS impact which I need to just go to the press release because I think it is on the adjustments table on the press release. The EPS impacts of Bora Bora was on a full-year basis I think it’s $0.40 and $0.08 last year. I’ll come back to you and clarify those figures afterwards if I may Kevin.

Kevin Miller - Bear Stearns

And the property level EBITDA for Bora Bora?

Paul White

Well, EBITDA for Bora Bora last year was about -- this is off of my head, but I’m pretty sure it’s about $1.4 million profit last year and this year, it was about a $2.6 million loss. That might be plus or minus $100,000.

Operator

Your next question comes from [Mike Donigar – CR Trends].

Mike Donigar – CR Trends

I was just going to take a second as one of the largest shareholders to comment on one of the previous callers that asked a question, which is with respect to the potential offers for the company.

I mean, with all due respect I think the history of the situation brings us well beyond the hypothetical. We’ve seen an offer or potential offer of $60 a share from Dubai and we’ve never really been given a good explanation as to why that offer was so “conditional”.

In the past six months, we’ve seen two strategic bidders acquire 10 or more percent of the company; the company is clearly concerned about that and putting in a poison pill which we actually supported.

There’s also been plenty of public filings and press releases as you suggested that show the potential acquirers may be getting frustrated and feel uncomfortable approaching the company.

I think what the previous called asked for was that you all confirmed publicly what you’ve already said privately to all of us and that is that if a valid and attractive offer was made for the company, the company’s economic shareholders, the Class A shareholders, would be given a right to vote on that. I don’t really think that is too much to ask for given the circumstances and I think it allowed us all get on to the real issues which are the continued excellent growth of the company and get these questions out of the way.

Paul White

That is the same question I think that Benjamin asked us earlier on and my answer is the same. I don’t think you’d expect me to say anything different. What I said all along is that we have a responsible board of directors which will act in a responsible way. As far as potential offers are concerned, Michael, I mean from our point of view that’s what they are at the moment. There is no substance to what is out there. There is a lot of talk, a lot of speculation. If you consider calling a board of directors and my management team entrenched and a bunch of fossils as a way to do deals, then you have a different sort of attitude to M&A than I have.

But the bottom line is there is nothing factual happening and we cannot say that we’re going to do x, y or z until something factual does happen.

Mike Donigar – CR Trends

I 100% agree, I just --

Paul White

What we are doing is speculating ourselves, and for me to speculate as the CEO of a public company I think is a very dangerous thing to do.

Mike Donigar – CR Trends

I can say with just all due respect, I’m not asking you to speculate in any way, shape or form and I think we have had this conversation before. I just simply think given the evidence that we can see in the public marketplace there is ample reason to believe that a process is potentially frustrated. Not that the board has acted in an entrenched manner, but that the process potentially frustrated. By saying the one comment, will Class A shareholders be able to vote on a fair offer will end all the frustration and it doesn’t ask you to pose a hypothetical in any way.

Paul White

There are a number of deals that we’re looking at the moment, that I could say I am frustrated by as well, but I think that’s the whole thing of doing deals in the market. But Michael, I don’t want to just repeat for the record what I said early on but you heard my answer to the question earlier on and that’s where we sit at the moment.

Operator

There are no more questions in the queue at this time.

Pippa Isbell

Thank you very much indeed, everybody and good day.

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