Orient-Express Hotels Q2 2008 Earnings Call Transcript

Orient-Express Hotels (OEH)

Q2 2008 Earnings Call Transcript

August 5, 2008 10:00 am ET

Executives

Pippa Isbell - VP, Public Relations

Ed Hetherington - Secretary

Paul White - President, CEO

Martin O'Grady – CFO

Analysts

Michelle Ko - UBS

Joe Greff - JP Morgan Chase & Co.

Amanda Bryant - Merrill Lynch

Maria Sloven – Oppenheimer

Presentation

Operator

Thank you for standing by and welcome to the Second Quarter Earnings 2008 Conference Call for Orient-Express Hotels. At this time, all participants are in a listen-only mode. There will be a presentation followed by a question and answer session.

(Operator Instructions) I must advise you that this conference is being recorded today, Tuesday the fifth of August 2008. And I would now like to hand the conference over to your speaker today, Pippa Isbell. Please go ahead, and thank you ma'am.

Pippa Isbell

Thank you very much, operator. Good morning, ladies and gentlemen. As the operator indicated, this is the Second Quarter Earnings Conference Call for Orient-Express Hotels. We issued our news release last night and it is available on our website at Orient-Express.com as well as on the website of the SEC.

For anyone who has not yet seen it, the highlights are as follows. Second quarter total revenues of $188.6 million, up 14% over prior year. Same store RevPAR up 16% in US dollars, 10% in local currency. EBITDA of $52 million, up 4% over prior year. Second quarter net earnings from continuing operations of $21.7 million, up 7% over prior year. And EPS from continuing operations of $0.51 per common share. Adjusted EPS of $0.49 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 Ed Hetherington, Company Secretary to whom I will now hand over for the usual housekeeping note matters. Thanks, Ed.

Ed Hetherington

Good morning, everyone. Before we get started, I would like to read out our cautionary statement under the Private Securities Litigation Reform Act of 1995.

In the course of remarks to you today by Orient-Express Hotels' management and in 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 will now turn the call over to Paul White, CEO of Orient-Express Hotels.

Paul White

Thanks, Ed. Good morning, everybody. Pippa gave you the highlights of the quarter, a quarter which in many ways is a reflection of the times in which we operate and a reflection of the demand issues we outlined back in November 2007 when we set out our medium- and long-term objectives.

No question, market conditions are challenging. We have heard this from other lodging companies, companies with broader outreach both in geographic terms and across the segments from budget to those in the homogenous five-star market. We hear continually from industry leaders in other sectors, even today the commodities sector, that they are feeling the impact of global inflation as the world experiences a re-adjustment in spending habits.

Interestingly today I am in New York, and over breakfast I read the New York Times lead article focused exactly on this issue. That said, it is important to note that Orient-Express Hotels is unusual. We serve the highest end of the luxury segment. We have a resilience driven by the economic strength of our global client base. We operate essentially in markets where our clients demand us to be. Operating in Laos, in Saint Petersburg, Russia, Falls Iguacu, Brazil, and Machu Picchu in Peru is a very different proposition than the operating in the likes of Boston, San Francisco and Chicago.

Our situation simply cannot be compared to other public competitors because our customers are more insulated from the effects of the broader macro economic conditions that exist today.

On today's call, I want to focus on three areas. As usual I shall give some further color on the quarter. I will update you on how we have adapted our approach to real estate development, bearing in mind the events of the past year, and finally how we expect the business to perform going forward.

In the second quarter, we achieved 10% same store RevPAR growth, ranging from 7% in North America to 14% in the rest of the world. That's all in local currency. Average rates in Europe were over $900, RevPAR in North America over $250.

If we look at EBITDA, all our regions show growth with properties in Russia, Spain, Mexico, Brazil and Asia performing ahead of our own forecast. We are achieving this growth despite broader economic challenges facing each of these regions. For example, Russia is experiencing inflation almost double that in the Euro zone and in the US. This in particular impacting wage costs. In addition, all regions are being impacted by food price inflation and of course the direct and indirect effects of fuel pricing.

In America, the results at the Windsor Court, New Orleans were particularly strong and I must compliment the City of New Orleans for their continued support, not just on behalf of the Windsor Court, but on behalf of our industry.

Another challenge is the weak dollar, which impacts our American international travelers, who make up nearly 30% of our clientele. In Italy, the shoulder seasons were impacted with the US travelers declining by 3 percentage points from 30% to 22%. True, the well-documented garbage crisis helped kill the Amalfi Coast in the early part of the quarter. Thankfully, President Berlusconi acted with haste to resolve this.

The weakness of the pound also impacted the short-break traveler out of the UK, which we as a company, felt in Portugal and Italy. We have performed in spite of these headwinds because we did see them coming. The economic environment was something we alluded to back in November. We have been very focused on execution. I strongly believe we have shown prudence in navigating these difficult times and as those have known OEH for a number of years would expect, we will continue to navigate with continued diligence.

So let us look at the short-term outlook, i.e. the rest of 2008. Before I give you details for this fix, I think we -- it's worth saying we are seeing the benefit of a geographically diverse portfolio. There are areas of the world, which are showing strength, which overall is offsetting the areas of weakness. Lead times, as back in 2002, are beginning to shorten.

Bookings for the rest of the year are 4 percentage points down on prior year. If this translates to a 4% percent volume drop and rates grow in line with current expectations, this will see same store RevPAR within the guidance range of 6% to 8%.

Before the question comes -- and those with the complex models will be saying this means you are close to the top of the range and the bottom of the range after all year-to-date you are already up 11% and yes current data would support this. I think we do need to see ourselves through to the end of the year though.

More specifically bookings for the remaining five months of the year are 7% behind in Europe and 9% behind in the United States, but 6% behind -- 6% ahead, sorry, in the rest of the world, all on a same-store basis.

On a rolling 12-month basis, Europe is 7% down, the US only 2% behind, with rest of the world 7% up. Overall, 1% up, but it is very early to make 2009 predictions.

Meaningful data is emerging from the rest of the world properties, which are beginning to enter high season. Early pace in Africa and Asia looks positive, up 5% and 20% respectively. Our property in Charleston, South Carolina, essentially a groups property, donated by the domestic US market, has -- which has longer lead time, is currently sitting on 49,000 room nights, which is only 500 room nights behind the same point last year.

Trains and cruises bookings on a revenue basis of 4% ahead on a year-to-year basis. This despite the road to Mandalay being taken out of action, both this year and in 2009.

This all leads us to leave revenue guidance unchanged. However, factoring in the impact of costs, food costs, fuel and some areas the wage pressure, we believe it is more realistic to say that we will come in around the lower end of the EBITDA range that we issued some 12 months ago.

On to real estate. A few weeks ago, our real estate advisor started the process of re-launching Cupecoy. A strong marketing exercise will build momentum over the next four months with a sales push planned early in 2009. The project remains on schedule in 2009. We have just over 100 units to sell, which coupled with the Marina retail and food complexes, will be the most desirable residential area in St. Martin. Despite the climate, we have found two banks, one US and one local, who will offer minimum 50% finance on a non-recourse basis for clients wishing to buy units.

Elsewhere, as you would expect, we have taken a more measured approach. Whilst we have great land in Mexico, Asia and Portugal, these projects today are a challenge to fund and with demand slower in these regions, we feel it is more prudent use of cash resources to pause on these projects for the moment.

Longer-term, the land still exists. It’s value remains as it was when we first spoke of it. Strategically, we will continue to re-assess the opportunities as one and individually as we go forward.

So what is the longer-term outlook? Visibility is difficult, and like my colleagues in the industry, I am not ready to make statements about 2009 and 2010 yet. What is clear to me aboard our management scene and economic common faces is that this downturn will be consistent with those we have seen in recent history with downward pressure on demand lasting at least two to three years. Any shorter timeframe is a welcome upside -- will be a welcome upside to the price.

The key issue for Orient-Express Hotels is to have a strategy to deal with the challenges over the next couple of years, and insure that we are positioned for recovery when the market turns in our favor. During the last down cycle, the Company chose to forego market share, accepted at the time, and even now as a central approach. Occupancy dropped, RevPAR dropped and with it margins. Costs are well controlled. This was good, solid management.

Today, we view things similarly, but with some subtle differences. When you trade at a 40% RevPAR premium than your nearest common competitor, you need to cut prices a long way before you can stimulate demand. What are our clients telling us? Our clients are telling us they are willing to pay but they want value.

I was at Carcassone last week, at Hotel de la Cite. When I visit properties, I tend to make a point of meeting the guys at the coalface. It is the only way I can really feel the business. Whilst having a cup of coffee in the reservations office, we actually debated what had changed in the attitude of the clients making their booking. What do they do differently at the point of reservation? The reply was quick and to the point. They are looking for value or even better, enhanced value. It doesn't seem to matter whether they are spending 500 euros, 5,000 euros or 15,000 euros. Value for money is the key.

To deliver this value and underpin demand, we will see short-term drops in margins, but these will be short-term, and by maintaining market share, it sets the Company well for the future. Finally, on inflation there is always a positive. Increased costs are always followed by increases in rates. There is always the one-year differential, but the effect does balance out.

OEH has an interesting pipeline of new product, which hits the market towards the end of this period and a few sooner. El Encanto will open at the end of 2009; Bali early 2009. And our recently announced projects in South and Central America and New York in 2011 and 2012 respectively.

These times are times when companies should be looking to (technical difficulty).

Pippa Isbell

Operator, we seem to have some clicks on the line. Are you still there?

Operator

I am indeed, ma'am. I am just looking see what I can find for you. I didn't know if it was coming from your line.

Paul White

Okay.

Pippa Isbell

Well, we'll carry on.

Operator

Thank you so much.

Pippa Isbell

Sorry, Paul. Carry on.

Paul White

I am sorry. These times are times when the Company should be looking to enhance the portfolio. We announced the (technical difficulty). We are now (technical difficulty) interference -- my apologies. We are now seeing distressed properties begin to emerge well in Europe as we did in the mid-'90s and in 2003 and 2004. We need to be ready to exploit these opportunities as and when they appear.

Operationally, the Company has addressed pricing in source markets and whilst our business model does not guide us to reduce prices as in recent cycles, sensible and selective price increase will be the order of the day. Standards will not drop as without these, the model is destroyed. So margins can compress. Diligence in cost control, further exploitation of economies at scale on a regional basis will see EBITDA margins reduction kept within what will be considered acceptable ranges.

To mange our cash flows, our main tool is to tend to capital expenditure. In the last 12 months I have visited over 50% of the portfolio. My senior team -- between them over 100 -- has visited the whole 100%. The portfolio, I can tell you, is in great shape. Significantly, T debt only becomes due in 2011, so when the -- so whilst the outlook may -- is rocky, this company is strong and well set to continue to navigate any choppy waters and come out strong as we have before and as our industry has before. Martin?

Martin O'Grady

Thank you, Paul. Good morning, everyone. Turning to balance sheet items, at the end of the quarter, we had cash of $73 million plus an additional $45 million of funds available under working capital and revolving credit facilities.

Additionally, we still have un-drawn construction finance facilities totaling a $120 million for our projects at El Encanto, Cupecoy, Cataratas and Buzios. For our New York hotel project, in what has been a difficult and challenging financing market, we have finished negotiating a term sheet with two international banks for acquisition financing for the land component. We anticipate receiving the bank's full credit committee approval within the next 30 days. After we have determined the exact specifications of the building, we will be able to arrange appropriate construction financing.

Taking into count of our total debt of $835 million, as standing working capital facilities of $64.5 million and our $73 million of cash, our net debt at the end of the quarter was $826 million. On a trailing 12-month basis, our EBITDA ratio was 5.3 times. The weighted average maturity of this debt was nearly four years. Our current portion of long-term debt at the end of the quarter was $116 million. This included $81 million of borrowings under revolver facilities, which are technically repayable within 12 months, but in reality will be rolled over as they mature.

At the end of June, approximately 42% of our debt was fixed, and the average cost of debt, including margin was 5.9%. I will now pass you back to Pippa.

Pippa Isbell

Thank you very much indeed. We will now open the call for questions. Thank you very much, operator.

Question-and-Answer Session

Operator

Thank you, ma'am (Operator Instructions) And your first question from UBS is from Michelle Ko. Please ask your question, ma'am.

Michelle Ko - UBS

Hi. Good morning.

Paul White

Good morning, Michelle.

Michelle Ko – UBS

How are you? I just have three questions. I was wondering in terms of the 21 Club financing, do you still anticipate spending $220 million? And are you planning to find another equity partner? And also, in terms of the -- I believe you have a first payment due of $46 million before the end of this year. Is that still scheduled for the fourth quarter?

And then in terms of the guidance for the rest of this year, I was just wondering, you said you were going to be at the lower end of your prior range, which I believe is probably 160 without the real estate EBITDA. What are you expecting in terms of the real estate EBITDA for '08? And then lastly, I was just wondering -- it seems like most of your Europe bookings are down for the year. I was just wondering if you could quantify like what areas that was in. What impact Russia is in that number? They seem to be a big part of the earnings in the second quarter, and how business trends are trending there.

Paul White

Yes, sure. I'll take the questions in order. First of all, on the New York hotel project, yes we are in talks with a couple of bodies as with regard to partnership. I -- you'll -- probably people will hear me say this throughout the day – I am not ready to say exactly who until we have got the deal nailed but we are looking for a partner. What we're looking for ideally is a straight 50/50 partnership. The project is enhanced, compared with the project that we launched back in I think it was November last year. And I think the -- as things go to plan the cash components looking at just a 50:50 debt equity and with a 50% partner, we'll be in the $75 million to $85 million range.

On the payment to the New York Public Library, it does become due towards the back end of this year. The key criteria is the library have to vacate the premises and then we get the premises handed over to us, but we do have -- I think Martin indicated we have an outline term sheet for finance on this piece, and we fully expect to close that between now and the payment being due.

On to the guidance. Yeah, I mean the -- obviously we're coming in to our main high season in Europe at the moment, which means that the bookings data going forward is more towards the low season than in fact the high season months. So big movements of 100 or 200 bookings can have an impact on the percentages.

Just on Russia, you asked specifically, the bookings pace in the next of months there is flat. The positives in Europe really are Portugal, which for Q3 and Q4 is tracking 10% and 17% ahead. The negatives, the small property we have France is suffering at the moment. But again, they are quite small numbers. La Residencia, interestingly is performing well, Ritz Madrid also.

I think -- really our focus for Europe is on 2009. We are looking at a number of different scenarios, but honestly, Michelle, it is just too early really to be sort of actually going out and making strong statements about where we think demand is going to be in 2009.

Michelle Ko - UBS

Okay. And in terms of the real estate EBITDA for '08…?

Paul White

I am sorry. Yes. So right. Martin is waving across the table -- I mean real estate. I mean we offer -- essentially what I am saying is that we're not expecting to release any EBITDA on Cupecoy this year because we will only be moving forward with the sales push early next year. And on the Villas at Saint Martin, our intention this year is to put them into hotel inventory for the Christmas season. They are only really being completed over the next sort of two to three months. So we don't want to set any expectation for real estate profitability this year.

Michelle Ko - UBS

Okay. And for next year, do you think it would be $10 million or -- ?

Paul White

Again, Michelle, I prefer to be consistent as we have in the past and I will start making comments about next year on or around the next earnings call in November when we've got more visibility.

Michelle Ko - UBS

Okay. Great. Thank you.

Paul White

Okay? Thanks.

Pippa Isbell

Thanks, very much. Could I just ask if we could limit ourselves to three questions each, just in the interest of time? If we have time left over at the end, we can come back to you. Many thanks.

Operator

Thank you, Ms. Isbell. And from JP Morgan, your next question comes from Joe Greff.

Please ask your question, sir.

Joe Greff, JP Morgan Chase & Co.

Good morning, everyone.

Paul White

Good morning, Joe.

Joe Greff, JP Morgan Chase & Co.

Paul, you had mentioned that you are willing to accept any short-term margin declines in an acceptable range. What are those acceptable ranges or what are you guys targeting, given your pace of bookings across the world?

Paul White

Well, I mean last -- Joe, you have followed Orient-Express since the very beginning, so you know that last time I think our margins dropped from sort of 30% to 21% at the worst, but it was a very rapid drop in margins and it was very much top line driven and volume driven at that. Again, the key to us is that we will be very diligent on the cost side. We will have this sort of one-year phasing issue on inflationary pressures that come through before we can adjust pricing. But I don't see us dropping like we did before, but at the moment, as you have seen in this quarter that we have just passed, I think real drop was a 100, 120 basis points, we could be looking at similar amount next year maybe, and maybe a little higher next year.

Joe Greff - JP Morgan Chase & Co.

Okay. Great. And I was hoping maybe Martin you can go through what your G&A, net interest expense, tax rate guidance for the second half of this year, if it's materially different than what you talked about previously?

Martin O'Grady

Yes. No, I will tell you, the tax rate would be consistent with prior guidance. And the interest cost this quarter was in fact impacted by a swap which we had the benefits of this quarter, but there was a charge last quarter, which is why there was a movement. And G&A is -- the run level that we are currently experiencing although like at the hotel level. We’re also looking very carefully at all of our G&A costs.

I wouldn't expect any sudden movements upwards for sure, but it's at the right level right now.

Joe Greff - JP Morgan Chase & Co.

Okay. And I know you don't want to talk about '09 operating guidance items, but can you talk about what you think your capital investment all and capital investment spends would be for '09 given what you know in terms of the pipeline with El Encanto and 21 Club, et cetera?

Paul White

Yes. Let us just start with the sort of the regular maintenance CapEx that we are doing, which we will include some works on the Hotel Cipriani and the Grand Hotel will be within the $25 million range. If -- I mean the key number will be what we spend on New York, and if I talk about the overall number rather than the 50% or whatever the joint venture comes out, I think we're forecasting in the region about $85 million to $90 million for 2009. And then I am going to defer to Martin, who might have this number off the top of his head. El Encanto for next year? Can you remember --?

Martin O'Grady

About $40 million to complete El Encanto. So those are the key numbers, Joe.

Joe Greff - JP Morgan Chase & Co.

Great. Thank you, guys.

Paul White

Okay. Thanks a lot.

Operator

Thank you, sir. And from Merrill Lynch, your next question comes from Amanda Bryant. Please ask your question, ma'am.

Amanda Bryant - Merrill Lynch

Great. Thanks and good morning.

Paul White

Good morning, Amanda.

Amanda Bryant - Merrill Lynch

I was just wondering if you could be more specific regarding your expectations for year-over-year increases in costs, such as labor, utilities, and wages. That'd be my first question. And my second question is do you happen to have an update on your discussions with the related companies? Thanks.

Paul White

Okay. On the first, I think I threw a number out actually when I was in New York last time at a conference that I was a speaker at that I felt that a sensible number for the industry to be using was in the 6% to 7% range. Now obviously for us that does vary in different parts of the globe, but I mean it was interesting that New York Times piece this morning that I referred to I think put food and fuel inflation at 0.8% per month at the moment.

Amanda Bryant - Merrill Lynch

Right.

Paul White

So it would sort of tie you into that sort of number.

Amanda Bryant - Merrill Lynch

Okay.

Paul White

We're certainly not going to be in this sort of 2% to 3% range this year. As far as the discussions with the related group, we're actually in due diligence at the moment and my team and the related team are -- sat around a table in London, probably coming towards the end of their day now. So really we'll be giving updates on that when we go through this due diligence phase.

Amanda Bryant - Merrill Lynch

Okay. Thank you very much.

Paul White

Okay. Thanks.

Operator

Thank you, sir. And from Oppenheimer, you now have a question from Maria Sloven. Please ask your question, ma'am.

Maria Sloven - Oppenheimer

Good morning. I just have –

Paul White

Good morning, Maria.

Maria Sloven - Oppenheimer

I have two questions this morning. The first one, on your EBITDA margins, can you give us more detail in terms of regions? Do you expect them to be declining more in US and Europe and still growing in Asia and Latin America? And then the second question is if you have any more updates on your real estate business? I know you mentioned before that you may have something for us in June. And if there's anything else you can give us in that. Thanks.

Paul White

Yeah. I mean the margins obviously -- what I was trying to say in the preamble -- and I'll just go back to it now -- is there are two things that are going to impact the margins. One is it's what we just talked about and I mentioned to Amanda, which is 6% to 7% cost inflation in certain areas that's obviously going to hit us. And we are in a very competitive world at the moment, so it is likely that in a restaurant, you are going to maybe absorb that within your margin to make sure that you keep the clients in the restaurant. Clients are becoming more demanding and as I said, they're looking for value.

I think yes, if -- as historically if we've got a situation where RevPAR exceeds CPI, then margins will grow. If RevPAR does not exceed CPI, then margins will obviously contract. The second element, which is -- which I want to make -- get over clearly -- is the fact of decisions that we can make to insure that we keep our market share. And we may make a decision to invest 1 or 2 percentage points more if you like in marketing or PR to underpin the market share in a particular property. And all those -- there is a myriad of decisions at the moment that we're making strategically as we plan for 2009, which can have an effect on a region-by-region basis.

I think your general statement is probably right. The areas that are showing growth, like Russia, like Asia, like South America, and South Africa, will probably see margins move in the right direction. But the -- where there is pressure in Europe and the United States in particular, then the margins may contract slightly.

On the real estate front, what the team has really been focused on in the last couple of months are the projects that we are committed to, particularly in Saint Martin. As I said, I made a decision probably shortly after the last conference call to press the pause button on what we were doing and in fact money that we were spending looking in places like Mexico and Asia. So what we will do is when we are ready to move on those again, we'll feed the information out. As I said, the land is still there, we still own it. The key is to make sure that we put it back into the market when there are buyers out there for these properties.

Maria Sloven - Oppenheimer

Okay. Thank you.

Paul White

Okay. Thanks, Maria. Hello, Operator?

Operator

Yes, sir. There appear to be no further questions. Let me poll one more time for you.

(Operator Instructions)

Paul White

Okay.

Operator

No sir. No further questions at this time. Please continue.

Pippa Isbell

Thank you very much indeed, everyone and have a good day.

Operator

Thank you very much to our speakers today. That does conclude our conference. Thank

you for participating and you may all disconnect. Thank you, Ms. Isbell.

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