Orient-Express Hotels' CEO Discusses Q4 2012 Results - Earnings Call Transcript

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Orient-Express Hotels Ltd. (OEH) Q4 2012 Earnings Call February 21, 2013 10:00 AM ET


Amy Brandt – Director, IR

John Scott – President and CEO

Filip Boyen – VP and COO

Martin O’Grady – VP and CFO


Sule Sauvigne – Barclays

Jeff Bronchick – Cove Street Capital

Karen Vanquiti – Oddo


Good day and welcome to the Q4 2012 Orient-Express Hotels Limited Conference Call. Today’s conference is being recorded. At this time I would like to turn the conference over to Ms. Amy Brandt, Director of Investor Relations. Please go ahead.

Amy Brandt

Thank you, Lisa. Before we start, I just wanted to quickly apologize for running a little bit late. We had some technical issues that we were trying to resolve with the phone. So thank you very much for joining us and welcome to the fourth quarter 2012 earnings conference call for Orient-Express Hotels.

We issued our earnings release last night and that release is available on our website at orient-expresshotelsltd.com as well as on the SEC website.

On the call today are John Scott, President and Chief Executive Officer, Filip Boyen, Chief Operating Officer and Martin O’Grady, Chief Operating Officer.

Before we get started today I would like to read out our usual cautionary statements under the Private Securities Litigation Reform Act of 1995 in the United States. 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 the forward-looking statements. Information about factors that could cause actual results to differ is set out in yesterday’s news release, the company’s latest annual report to shareholders, and the filings of the company with the Securities and Exchange Commission.

I will now hand over to John.

John Scott

Thank you, Amy and good morning. Thank you all for joining us today to discuss Orient-Express Hotels’ fourth quarter and full year 2012 results.

As you know in November of last year, I was appointed President and Chief Executive Officer and at the same time I joined the Company’s board. Prior to my appointment, the company was led on an interim basis by two board members, Philip Mengel and before him our chairman Bob Lovejoy. On behalf of our management team and the Board, I want to take this opportunity to thank Bob and Philip for their contributions to the Company.

I thought it would be important to take a little bit of my time today to introduce myself to those of you who I haven’t already met. I have been involved in the hotel industry for over 25 years. In an industry of hotel operators and hotel real estate investors, I’m a bit of a hybrid, having had a deep experience in both areas. I started my career in hotel operations in Asia, where I held a variety of senior management positions. I joined the Walt Disney company and have management positions in strategic planning and new business development.

From now, I entered the world of private equity real estate serving as managing director of acquisitions and asset management at Maritz, Wolff & Co for seven years. One of my early principle investments with Maritz, Wolff was our investment in Rosewood Hotels & Resorts, a luxury hotel operator and owner. I served as a director on the Rosewood board until 2003 when I was asked by the board to become the Rosewood’s President and Chief Executive Officer. I led Rosewood as CEO until 2011 when the company was successfully sold.

In addition to my work at these companies, I have also held the position of independent director on boards of Kimpton Hotels & Restaurants and the New York stock exchange listed Cedar Fair Entertainment Company where I still serve as a director. That brings us to today, where I have the honor of leading a company I have followed and respected as a competitor for many years.

Orient-Express Hotels is an exceptional company with non-rivaled portfolio of assets and a talented loyal and passionate team looking to provide guests with memorable travel experiences. I look forward to steering this company to what I know will be a great future success.

As I entered my role, it was essential that I focus the key management team on executing on a number of critical near term priorities. At the top of that list was making sure that we finish 2012 strong both financially and in terms of positioning our self for 2013. I will discuss my thoughts on that matter in a few moments. In addition, the company has been working for a long time on several non-core asset sales that with focus and determination we were able to successfully close in the last two months.

As we highlighted in our earnings release, this included the sale of Westcliff in December and the recent closing of the sale of Cupecoy, a noncore residential development in Saint Martin. An added benefit of the sale of the Cupecoy is that the post sale we will no longer be incurring an annual EBITDA loss of approximately $4 million. So in addition to the $45 million of proceeds of Westcliff and Cupecoy sales generated, we expect to realize ongoing cash flow improvements from the elimination of these real estate costs.

Enhancing our liquidity position has also been an area of particular focus for the company over the past few years. In 2012 and in early 2013, the company continued to make progress on this goal. In addition to selling the Westcliff and Cupecoy, and Casa de Sierra and The Observatory were sold earlier in 2012.

All the gallery sales have given us a stronger liquidity cushion for use on capital projects that have been approved through a disciplined and rigorous process.

For certain projects where we believe we have the capacity, we have recently chosen to pursue property level debt to fund our investments. Recently, we secured financing for two such projects.

In December, we borrowed an additional $9 million from our existing lenders at Charleston Place and most recently, we entered into a $50 million refinancing at our Grand Hotel Europe. These borrowings will provide funds for renovations at both properties. We believe that both programs will have minimal impact on operations.

I’ve also made some positive moves with core leadership team. Specifically, I’m pleased to announce that Ralph Aruzza will be joining the team in a few short days as Chief Sales and Marketing Officer. Ralph and I have worked closely together at Rosewood, and I’m thrilled to have the opportunity to work with him again.

I developed a deep respect for Ralph’s strength in direct sales, global distribution, strategic marketing and customer relationship management. Ralph is a great addition to the company and I look forward to having him join our senior management team here in London.

We’ve also consolidated the third-party management business, development business team here in London. I have a deep experience in this area as you all know from my background and this area will now be overseen by myself and our CFO, Martin O’Grady.

Finally of critical importance, we successfully reopened a 145 renovated rooms at Copacabana Palace and time for Rio’s peak season. With this opening complete, our technical services, sales and marketing and operations teams are now laser focused on the final stages of construction and the successful first quarter opening of our newest member of the Orient-Express family, the 92-key El Encanto hotel in Santa Barbara.

Over the past several months, I’ve been working closely with our senior management team to develop our strategy for continuing to grow the business and build shareholder value. We expect to share this plan with our Board in the coming weeks and in early May we plan to provide an update on that strategy to you at an Investor and Analyst event we will be hosting at the 21 Club in New York.

The foundation of our near-term strategy is clearly executing on opportunities to improve our core business. In other words, creating a sound platform for us is to successfully grow our business in the long-term.

Since I joined in November, I’ve had the pleasure of visiting several of our hotels and luxury chain experiences. And I have plans to visit others in the coming months. I have seen many positive things so far in my short time at the company and what I have concluded is that we have great resources and numerous opportunities to unlock incremental value at our existing properties.

2013 is really about execution and I believe we are off to a good start on this front. We will focus on several key areas that will provide us with both near-term and long-term benefits. Specifically, I’ve seen a real opportunity to expand our current as well as generate new revenue sources for our existing properties via a renewed focus on sales, global distribution, E-commerce and customer relationship management. The addition of Ralph Aruzza, who played a central role in building Rosewood’s successful global sales distribution and customer relationship tools, will help us execute on this opportunity.

Although I noted I have not yet visited all of our properties, I have initiated a strategic review process which is intended to identify assets with great potential that we should be focusing our financial and other resources via high return on investment generating projects.

The portfolio review will also help us determine which of our assets are financially and strategically noncore are and therefore should be considered for disposition. While I do not envision a significant number of asset sales in 2013, we will carefully look at noncore assets, sales that will contribute to our goal of continuing to improve liquidity and enhancing our balance sheet strength.

Our final key priorities in 2013 is the successful opening of several new Orient-Express properties including the El Encanto hotel in Santa Barbara and the addition of the Orcaella ship, which will complement our successful Road To Mandalay luxury river experience. I’m pleased by the early bookings for the two new properties and I am expecting strong operational and financial performance.

With that, I would like to say a few words about our 2012 performance. 2012 was a solid year that was in line with our expectations. In the fourth quarter we saw positive operating indicators across most regions. Filip Boyen will provide some detail on the individual regions in a few minutes, but at a high level we posted Q4 revenues of 128 million and adjusted EBITDA of 20 million.

Revenue was down 1% from last year and EBITDA down 3%. This modest decline was achieved despite the partial close of the main building a Copacabana Palace. If we remove Copacabana, which was affected by our major renovation there from our fourth quarter numbers, revenue would have grown 3% and adjusted EBITDA 12%. Likewise the same-store revenue per available room would have increased by 7% in U.S. dollar terms.

For the full year 2012, revenue came in at $553 million and adjusted EBITDA of $104 million. Given the challenging macroeconomic environment particularly in Europe, I am pleased with the overall performance. With a strong focus on controlling fixed and variable costs, our team here was able to achieve an adjusted EBITDA retention of 45%.

As you are aware currency did not work in our favor this year. With an average Euro to dollar exchange rate coming in 8% lower in 2012 than it did in 2011. As we look to 2013, we not anticipate the same negative currency drag that we had in 2012.

Looking at 2013 from a very high level, I am cautiously optimistic about what we are seeing on the bookings front. I am also keenly aware that some macro headwinds may continue and that the year will not be without its own regional economic challenges.

Towards the end of 2012, some of the regional economic conditions improved slightly, but we believe that we are not a 100% out of the woods yet. As such, we are putting a lot of internal focus on the first part of the year believing that we need to start the year off right to end the year right.

Our early indications for pace are positive. Philip will provide more detail, but we are seeing 11% owned hotel rooms revenue pace growth for the year. This revenue growth is particularly strong in weight and from our FIT travelers with some early softness in group, which is improving.

It’s worth reminding you that at this point in the year the volume of revenue on our books is relatively low. Having said this, we continue to push out distribution channels to drive business volumes in addition to rate growth.

Just one more comment before I hand over to Filip. As I noted earlier, we plan to be in New York in early May and will be hosting an Investor and Analyst event at the 21 Club. We will be providing more details in the coming weeks, and I very much hope to see you all in New York.

Let me pass you on to Filip, who will provide you with some additional comments on our properties. Filip?

Filip Boyen

Thank you, John and good morning, everybody. As John mentioned, a major feature of our fourth quarter was the impact of the partial closure of – a palace on revenue. However, the hotel has recovered quick and that the year is sold out with a five night minimum stay over New Year’s Eve and ADR for that period of $1,680. The hotel reported revenues for the night of December 31st, alone of just over $1.7 million, which in constant dollar terms was 5% ahead of last year.

Turning to our results for the fourth quarter by region; revenue in Europe was 32.1 million, down 2% from the fourth quarter of 2011. Same store RevPAR was up 7% in U.S. dollars due to a 13% increase in ADR offset by a three percentage point decline in occupancy.

Our two Sicilian properties, Grand Hotel Timeo and Villa Sant’Andrea both started the 2012 season fully refurbished after extensive works carried out over the last three winters. The hotel reported RevPAR growth for the quarter of 17% and 21%, respectively, in U.S. dollars compared to the fourth quarter of 2011.

Revenues in North America remained unchanged compared to the fourth quarter of 2011 with revenues from old hotels of 26.7 million. A 6% gain in ADR for the quarter was offset by a two percentage point decrease in occupancy, resulting in an increase in RevPAR of 4%. EBITDA grew to 3.6 million compared to 1.3 million in the fourth quarter of 2011, a period in which we experienced more one-off charges.

In the Asia Pacific region, we see a continuation of our trend of strong annual growth for the portfolio of six hotels that the company acquired in 2006, with this group of assets increasing EBITDA by $1 million to $2 million a year for the past three years. This trend continued in 2012.

Driven by the governor’s residence and office, fourth quarter RevPAR for the region increased by 18% due to a 13% increase in ADR and a 3 percentage point increase in occupancy and EBITDA grew by 13% to 3.3 million compared to the fourth quarter of 2011.

During the fourth quarter of 2012, revenue from owned hotels in southern Africa was 7.8 million, up 1.5 million or 24% from the fourth quarter of 2011. Mount Nelson Hotel in Cape Town saw increased demand from the movie production sector during the quarter, which we anticipate continuing through the coming year.

RevPAR for the region as a whole was up 13% in local currency for the quarter and up 4% in US dollars. The benefits of labor and other cost savings initiatives that were put in place in 2011drove EBITDA growth of 0.3 million in the fourth quarter from 1.7 million in 2011 to 2 million in 2012. This increase was primarily driven by our safari operations in Botswana, which saw significant EBITDA growth as a result of local currency rates strengthening.

As already discussed the partial closure of Copacabana Palace had the significant impact of results for the South American region. In the fourth quarter total revenue from owned hotels was down 3.6 million and EBITDA was down 1.5 million compared to the fourth quarter of 2011. However, excluding Copacabana revenue was actually 1 million ahead and EBITDA was 0.7 million ahead.

RevPAR for the region was down 20%. However, if we again exclude Copacabana Palace RevPAR for the quarter was actually up 7% due to significant increases at the other two properties, Hotel das Cataratas where strong demand from the domestic Brazilian market continued and Miraflores Park Hotel which experienced growth in occupancy and ADR.

Trains and Cruises produced the solid performance in the fourth quarter with particularly strong results from our Road To Mandalay river cruiser in Myanmar which experienced revenue growth of 1.7 million. Offset by decreases from the Venice Simplon-Orient-Express and the U.K. day trains as a result of declines in our charter business in 2012. I will give you a little more color on our charter business in a few minutes.

Looking at the breakdown of our revenue market segments, the fourth quarter mix remains in line with the mix from the fourth quarter of 2011 and what we have seen for the full year. The transient leisure segment remains our largest contributor at 55%, a 7 percentage point increase over Q4 2011. Wholesale remains stable at 20% while our group segment decreased from 21% in 2011 to 18% during the fourth quarter of 2012.

With the effect of the US elections and uncertainty over the fiscal cliff, slowing demand in these segments.

Our geographical mix remained fairly consistent throughout 2012. We saw the greatest gain in the quarter coming from the North American markets, which increased by 1 percentage point to 40% compared to the fourth quarter of 2011.

We continue to experience small declines in European business particularly from Belgium, France, the Netherlands and especially Spain due to the ongoing economic uncertainty. One pleasing trend has been the increase in demands from the UK market during the quarter from 13% to 14% year-on-year.

South America decreased from 12% to 10% due to the decline in Brazilian business as we renovate the Copacabana Palace. Our business from Asia grew by 1 percentage point to 7% compared to fourth quarter of 2011. We continue to add new online assets to expand our distribution channel and in January released a new version of our brand portal and booking site Orient-Express.com in Brazilian Portuguese, which we believe is the first amongst our peer sets and this month have introduced Mandarin Chinese, Mexican, Spanish and French site will come on-stream during the remainder of Q1.

We engaged the new public relations agency in Mexico City who started on January 1st and has begun proactive outreach on behalf of the company to the Mexican, Chilean and Argentinean markets.

Booking pace for the coming quarter and full year are both positive. 2013 revenue on the books for owned hotels is up a very encouraging 11% compared to the same time in 2012. That figure is up 13% on a constant dollar basis.

For owns trains and cruises the quarter is up 10% with the full year up 7%. Full year revenue growth is driven predominantly by rate with ADR up 7% year-on-year and occupancy up 4%.

Our strongest performers for full year base are Hotel Cipriani, where the highly popular Venice Biennale Art Festival will again take place during 2013, up 50%. Charleston Place, which is up 7% due to good group business. The Governor’s Residence, which is up 103% and Road To Mandalay, which is up 66%. Road To Mandalay to-date already has $8.5 million of confirmed business on the books with a third of $1.5 million of tentative bookings, representing just over 91% of its total 2013 budget.

For Orcaella, which comes online in July, we are seeing tremendous forward bookings with four charters for private tour groups worth approximately $1 million already confirmed for 2013 and total revenue on the books in U.S. dollars of $1.7 million with a third or $0.4 million of travel options taken. This means that 111% of Orcaella’s total budget for 2013 has been met five months before our first sailing.

Looking at our market segments for 2013 revenue from owned hotels for the transient leisure segment is up 13%, while for owned trains and cruises this figure is down 2%.

For the Group segment on the full year basis, revenue for owned hotels is up 6%, for owned – our owned trains and cruise businesses are showing considerable growth in charters. To give you an illustration, during 2012 the Venice Simplon-Orient-Express had only one charter and the Royal Scotsman two. Already for 2013 we have secured five charter trips for the Dizoi and four for the Royal Scotsman, a performance which matches our previous peak.

On the whole, we delivered a solid performance over the past year despite tough economic conditions and the previously discussed closure of the Copacabana Palace main building. Positive indications from our forward bookings suggest this trend will continue into 2013.

I will now hand over to Martin.

Martin O’Grady

Thank you, Filip. Good morning, everyone. Looking down from EBITDA, depreciation charge in the quarter was 12.4 million up from 11.3 million last year, interest expense at 7.2 million, down from 7.4 million last year.

The tax charge in the quarter was 12.7 million that compares to 15.1 million in the fourth quarter last year. Fourth quarter tax expense in 2012 includes a $3.8 million deferred tax charge relating to one off discrete items in the period.

The fourth quarter 2011 expense includes a 7.4 million charge in respect of the gain on the disposal of excess development lines of the 21 Club. Cash tax in the quarter was 7.9 million.

2013 we are currently expecting a tax charge in the range of 17 million to 21 million. And we expect it to be spread over the first quarter a credit of 1 million to 2 million. In the second quarter a charge of 7 million to 8 million. In the third quarter, a charge of 7 million to 8 million and in the fourth quarter a charge of 5 million to 6 million. And the cash taxes, we expect that to be for 2013 between $17 million and $18 million spread evenly.

Overall, our adjusted net earnings from continuing operations in the quarter were a loss of 9.4 million compared to a loss of 7.2 million in the fourth quarter of 2011. In the balance sheet at the end of the quarter, the company had 93.4 million of unrestricted cash plus an additional 4.5 a fund on short-term lines of credit available.

Total debt at the end of the year was 619.5 million and our net debt at the end of the quarter cash including restricted cash of 21.1 was $505 million and our net debt to adjusted EBITDA was 4.8 times. Our interest cover was 3.9 times. Our debt maturity schedule is now as follows.

In 2013, $92 million and that includes $30 million of our reservation. In 2014, $171 million, in 2015, 304 and after 2015, 63.

At the end of December, interest expense on 49% of our debt restricts and the average cost of debt including margin was 4.0%. The weighted average maturity of the debt was 2.6 years. With cash flows in the quarter, the net cash outflow from operating activity of 14.7 and there was 29 million of investments in the quarter and that included 11.5 million of Al Canto and 9 million for the completion of refurb at the Copacabana Palace.

There were net debt repayment of the loans and financing arrangements during the quarter 9.6 million and that comprises drawdowns of 24.5 offset by scheduled debt repayments including our reservation of 15.

In December, we signed the new $50 million loan at the Grand Hotel in Europe, completion of the facility by drawdowns that’s expected to take place in the first quarter of 2013. It will provide $26 million for a three-year refurbishment program at the property. The first drawdowns of 5 million we paid existing debt and immediately we drawdown $19 million of cash and that cash will come back to the center. This new facility got a five-year term and it’s a margin of 7% above LIBOR.

Also during the quarter we completed an extension of our existing facility Charleston Place and that gave us $9.2 million of cash that went terms of balance sheet and 9.2 million of additional borrowing of 3.5% above LIBOR. And that $9.2 million will be used to finance the first phase of our three-year refurbishment program that will cost about $28 million in total.

Key lines maturing this year are an umbrella facility of 18.3 million secured in our North American properties and that excludes El Encanto, and 44.2 million secured on the Memoir in the U.K. and Reid’s Palace in Madeira and discussions about that are progressing well and at this point we’ll be not anticipate any net repays of debt on those facilities.

In addition to the refinancing, John has mentioned that we received proceeds of 45 million from the completion of the sales of West Porto Cupecoy. And it should be noted that $19 million of that total was received after the year-end.

And finally with respect to our committed project capital expenditure and El Encanto it is about $25 million of investment remaining to take place in 2013 and of that 19 million is going to be financed under our El Encanto construction facility.

And with that I’ll hand back to the operator for Q&A.

Question-and-Answer Session


Thank you. (Operator Instructions) We will now take our first question from Judy Sauvigne of Barclays. Please go ahead.

Sule Sauvigne – Barclays

Good morning. It’s Sule actually. I wanted to ask about it sounds like you have a renewed focus on growing the hotel management business. What kind of targets do you have in mind for 2013? What should we envision a couple of hotels under management by year end? I mean just kind of explain that, please.

John Scott

Sure. Thank you first of all, Sule, it’s my first question as CEO. So...

Sule Sauvigne – Barclays

Congratulations, by the way.

John Scott

Thank you. As you probably concluded from my background I have got a lot of experience in this area. I will tell you that our focus on the management business is really a focus where our core business is in the owner operator model where we have a great deal invested in our existing assets.

We will leverage that platform and that business, our world class brand, infrastructure and management talent where it makes sense. So I would say our focus on the management side will be one of – quality versus quantity. In this business you can run around chasing a lot of opportunities and spending a lot of time in resources doing that. So I think what I – the approach I’ll bring to this is one of discipline. We’ve got a number of projects in our pipeline that we will review carefully, review to make sure they’re one. They are a good fit locationally for where we think we can be successful. Two, they are with owners that are thoughtful and share our vision for not only the property, but for running the business. And then finally, where we believe we can add value to owners and that with agreements that are financially attractive to us.

So with that said, I think we will be selective. I won’t put a target on how many we will do, because I think the reality is I’d rather do fewer than more and make sure that we execute well on this type of business. So that’s the approach I will take without giving you specific targets.

Sule Sauvigne – Barclays

Okay. Thank you for that. And just so I understand it correctly, will the hotels you eventually manage for third-party owners be branded as Orient-Express Hotels or will – or will they just continue with their current name?

John Scott

We have an approach of managing iconic assets with very strong brands in their own. I think that’s an area where we differentiate ourselves from others from chain like luxury hotel operators. So I think to be honest, I think that our future probably is in independently named and branded assets where we can add value through our management, our distribution, and our co-branding strategy that we have employed our umbrella brand.

Sule Sauvigne – Barclays

Okay. And just one more, if I can. I’m just wondering how forward bookings are looking for El Encanto this year?

Martin O’Grady

Forward bookings for El Encanto are encouraging. We have a very strong sales and marketing team in place with great experience in the California market. In addition, we have Ali Kasikci who is a bit of a legend on the operational side there. They are looking good. Obviously we are working hard to get the soft opening done and get the hotel opened by March the 18th, which is the target date, but I would say bookings are looking very encouraging.

Sule Sauvigne – Barclays

Is that going to be a heavy group hotel?

Martin O’Grady

Not really.

Sule Sauvigne – Barclays

Okay. It’s going to be a nice mix of about 25% groups and 75% leisure.

Martin O’Grady

Okay. Thank you.

John Scott

Thank you, John.


We will now move to our next question, which come from Mr. Jeff Bronchick of Cove Street Capital. Please go ahead. Your line is now open.

Jeff Bronchick – Cove Street Capital

Thank you, and good morning or good afternoon I guess I should say. John, maybe just talk a little bit about management team in general and, you know, I know it hasn’t been a long time but any other – can we talk about any other changes in actual bodies in management structure of higher – reporting is systems and how the company will be actually run differently than it has been in the past?

John Scott

Yeah. Thank you, Jeff. Look, I haven’t been in the seat very long, but as you have already heard I like to move quickly to make sure I have the right team and that we are organized not only to be very effective in what we do but also to be very efficient. So from to that end having Ralph join us and be located here in London is a positive step not only from an efficiency, but also from an effectiveness perspective with our large degree of sales and marketing resources here. So we are very much looking forward to him being here.

There is – on the development front, being overseen by myself and Martin, I think that consolidating of that function here again provides us with a renewed focus and again with an efficient business model that we think will produce good results. So from that perspective, I feel pretty good about the team that I have. I feel very good about the team that I have as I look around the table here.

And I’m excited about kind of that front. But we are going to continue to look at how we operate, how we operate locally, regionally and from the corporate. And I will tell you that as I think about how you we invest in properties from a discipline perspective, I think about organization and overhead in the same way, which is to say the dollars we spend on overhead need to be efficient and productive, and have a good return on those dollars.

If there are areas where we can find savings or we can move costs from one area to an area that is perhaps more productive, I’m certainly eager to do that. But I don’t really have any specifics to give you other than I think the core executive team is functioning very well, and I think we will continue to look for ways to be more effective and efficient in how we manage our organizational structure.

Jeff Bronchick – Cove Street Capital

And on that basis, I mean is your initial inkling on a range of what you see is the company just absolutely ripe for cost savings and one should expect over the next few years improvement in EBITDA from a major multi-year efficient cost saving plan or on the other side would you describe the company as has been utterly deficient in intelligent spend, whether it’s building reservation systems and marketing programs where one would see looking at – whatever last year as a best as, frankly, to achieve peak numbers you will have to spend money up front or is it in the middle where savings will offset that? How do you see that on the continuum?

John Scott

Yeah. Excellent question. I think while some would like to hear one answer and others would like to hear the other, I think it is a balance of the mix of those two. If there was low-hanging fruit I look at this team with Martin and Filip and the other interim folks that have been here and have prior leadership, I honestly believe low-hanging fruit would be very – there is some opportunity but there isn’t a lot of low hanging fruit on that which means that we are going to have to think creatively about how we organize ourselves and how we execute in terms of potentially finding savings. So I don’t want to send a message that there is a holy grail in terms of cost savings, but as I indicated we’re open to looking at that.

On the – on the investment side, again it’s a balance. The reality is, I don’t believe we’re going to be spending material amounts of incremental dollars for areas where we’re insufficient. But if we may be moving costs from one area to the other or investment dollars in the areas from one area to the other. So my sense is there would be – over the next year, I will be looking at that intensely. I hope there is some opportunity to do things differently and that’s my commitment. I’m not giving targets. I’m not giving indications on what we may or may not be willing to do but I’m certainly focused on that.

Jeff Bronchick – Cove Street Capital

Okay. And my last question is as far as the balance sheet as you and I am sure everyone on the call is painfully aware the company has lurched from one liquidity crisis to another with miserable and terrible results for anyone who has ever owned a share in this, this company. And my can question is when you look at the balance sheet, are you uncomfortable with where you stand and the goal is to as part of your strategic for your review, you know, attempt to aggressively de-lever, not just manage from liquidity event to liquidity event but de-lever. Would you rank that as a very high priority for you or are you comfortable with where you stand and you think you can manage through and reduce it over time just on a normal course.

John Scott

Yeah. Another good question, Jeff, thank you. Look, when I looked at this company years ago as many of you did, where it had gearing on the leverage on the balance sheet was close to 8 or 9, maybe even 10 times EBITDA. When I looked at the company at that time it was a great concern to me.

Today, when I was looking at this opportunity and coming onboard, I wanted to make sure that I had the runway to be successful from a financial and a balance sheet perspective. I had that comfort. I think they’ve done a good job of bringing down the leverage to a reasonable level and I think the concerns of liquidity are perhaps exaggerated. I think the liquidity concerns relate to specific projects that we have undertaken that have very high ROIs and from that perspective, I think the reallocation of capital from assets that are underperforming with low return on assets and where we have the potential for liquidity to drive liquidity from that to reinvest in those projects has been positive.

So I think what I have seen in terms of balancing paying down debt, getting it to a reasonable level, I think we will continue to do that on a measured basis. I wouldn’t say that tomorrow, we need to wake up and be at three times or 3.5 times. I would say that I would feel comfortable with that number coming down over time from where we are today with also the balance of investing in the key projects where we see a very high ROI.

So the answer to that question is I feel reasonably good about our balance sheet where it is today. As I do about liquidity and we will continue to execute on liquidity in two ways. First of all, driving higher EBITDAs, it’s not just about selling assets. You don’t sell your way to excellence and greatness. You – our efforts on the sales front will be to – focused on realigning our investments and getting higher returns on those assets where we think we can drive better results.

So that’s my perspective. I don’t think I am overly worried about the balance sheet nor am I overly worried about liquidity. But we will continue to execute on both of those.

Jeff Bronchick – Cove Street Capital

Well, thank you very much for your comments and I sincerely hope that the Board of Directors and all those involved let you execute. Have a good day.

John Scott

Thank you, Jeff.


(Operator Instructions). We will now take our next question from Mr. Stefan Fernando of Reuben Brothers. Please go ahead.

John Scott

Hi, John. Hi, Martin.

Unidentified Analyst

Hi, Steve.

John Scott

I think one of the questions I had has just been asked basically by Jeff read about net debt to EBITDA levels. And I think, I remember having a presentation earlier in 2012 where the target was is to reach 3.5 times, but I think you have addressed that now.

My second question was more from a governance point of view and I know the question has been asked before, but John I mean with regards to the joint structure, I mean, do you have any intention to change that and to probably bring more liquidity to the shares and like more of the stock and like bring more people interested in the stock and probably increase the share price by changing that potentially?

John Scott

Yeah, and Stefan, thank you. You and I had the opportunity to meet not too long ago and we discussed that.

Unidentified Analyst


John Scott

At that time. I don’t believe this is the right forum to have that dialogue. I’m happy to have that conversation with you again in a different forum and as such, you know, I’m really not going to comment broadly on the AB structure. I will tell you as I told in your meeting – in our meeting that again, when I joined the company it was largely because I had the opportunity to meet with all of the directors. I believe that they were committed to creating shareholder value and that they were committed to supporting me in my role, and what I need to do to be successful here. And that they were truly committed to good governance. And so look, its early days, I have joined the board, and I am working closely with them to make sure that we delivered on shareholder value. I will take your comments with great seriousness, but I’m not really going to comment on the AB at this point.

Unidentified Analyst

Well, we’ll support you if that is the case. So thank you for the answer. I think you addressed the other question. So I am fine with that.

John Scott

Thank you, Stefan. I look forward to seeing you again.

Unidentified Analyst



We will now take our next question from Karen Vanquiti of Oddo. Please go ahead.

Karen Vanquiti – Oddo

Hi. I wanted to know if there was any update or any further contact from Indian hotels regarding their proposal?

John Scott

There has not been and it’s not – it hasn’t been one of our priorities. We haven’t been spending much time on that because it is not very productive for my team and myself to do so. So we have not and our primary focus is been on our core business and executing.

Karen Vanquiti – Oddo

Okay. I mean would you be open to a proposal from them if it was at the higher level?

John Scott

I’m not going to speculate on that. I mean we can spend our life worrying about that or speculating on that or the rest. It just isn’t really that productive for us. There is so much opportunity for us at hand here within the company that I would rather be focused on. So at this time, I’m not really going to comment further on that because the reality is it is just not very productive.

Karen Vanquiti – Oddo



(Operator Instructions). There are currently no questions over the audio.

Amy Brandt

Let me thank you all for my first earnings call and also encourage you to join us in New York at the 21 Club where I very much look forward to interacting with you on a one-on-one basis and at this point I will call the call to an end. Thank you all.


That will conclude today’s conference call, ladies and gentlemen. Thank you for your participation. You may now disconnect.

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