Earnings Call: H1 2020

Aug 5, 2020

Good afternoon, ladies and gentlemen, and welcome to the Hong Kong and Shanghai Hotels twenty twenty Interim Results Presentation Audio Webcast. Thank you for joining us. The results announcement was posted onto the stock exchange website this afternoon. We will begin with the presentation led by our senior management team, followed by the Q and A session. Slides will be displayed alongside the live audio for your convenience. You are invited to submit your questions at any time during the presentation by using the Q and A box on your screen. These will be read out loud during the Q and A session. Now with that, allow us to introduce our speakers for today. We have Mr. Clement Kwok, our Chief Executive Officer Mr. Matthew Lawson, Chief Financial Officer Mr. Martin Sawyer, Group Director of Properties and introducing Mr. Gareth Roberts, our Group Director of Brand and Operations Support. We would now like to invite our CEO, Mr. Clement Kwok, to begin the presentation. Okay. Good afternoon, everybody, and thank you for joining us for this online session. So we turn to the first slide, which is the review of the 2020. Obviously, everybody knows that COVID-nineteen has created unprecedented challenges for the hospitality industry, and we have been badly hit as one would expect. And that has, of course, not only been in our local market of Hong Kong, but across our global portfolio. So overall, I would say the 2020 has been the most challenging period I have ever faced during my long tenure with this company. COVID-nineteen first began to be felt in late January, started in Greater China. And actually, we had the businesses of our group had started pretty well in the beginning of the year. But as the COVID spread, the deterioration came pretty quickly. Six of our hotels have been temporarily closed, and the Peak Tram and the Peak Tower have also been heavily affected with the lack of tourists coming to Hong Kong. We, of course, immediately undertook as many cost savings measures as we could whilst looking after our staff and retaining the quality of our brand. And but despite the cost cutting efforts, we had an EBITDA loss of million for the first six months, which given the environment was not too bad. We came into this crisis with a low level of gearing and considerable liquidity, which we bolstered by arranging further facilities totaling almost HKD 3,000,000,000 during the first half. We believe our financial resources are sufficient to cover the group's cash burn even at the current levels of cash burn for at least the next eighteen months. Given our results in the environment, it is no surprise that the Board decided not to declare an interim dividend. Despite the high degree of uncertainty in the near term, our long term philosophies, values and commitments remain unchanged. We, of course, have substantial investments being made into our hotel projects for the Peninsula London, the Peninsula Istanbul and the Peninsula Yangon as well as the upgrade, the significant upgrade of the Peak Tram. These projects have also been affected because COVID has meant some of the sites have been closed and reduced working in other sites. And we are working hard both to assess and to mitigate what the effect of these delays might be. We continue to take a long term view. And we do believe that by maintaining and enhancing the quality of our assets, we will create significant value for our shareholders over the long term. So with that, I will ask Matt to summarize the financials for us. Thank you, Clement. As Clement has mentioned, COVID and the resultant shutdown of travel has had an unprecedented impact on both our operating performance and our cash flow position. We reported consolidated revenue, which declined 52% to $1,300,000,000 principally due to the decrease in the revenue recorded by our hotels division as well as a significant decrease in visitors to the Peak Tram and the Peak Tower. On the commercial property side, while rents continue to come under pressure in the luxury retail market, generally speaking, office and residential has held up pretty well. In response to the crisis, we implemented substantial cost saving initiatives, including the introduction of voluntary unpaid leave, placing employees of our closed hotels on furlough, making significant cost savings on operating expenses and the renegotiation of contracts. Inclusive of a number of government economic relief provided to certain operations, the group's operating costs decreased by 34% in the first half to 400,000,000.0 However, the decrease in costs was not sufficient to offset the revenue shortfall sustained by the group. And overall, we reported an EBITDA loss, as Clemen has mentioned, of $95,000,000 for the period. During the period, we also reported impairment provisions made in respect of two of our assets, namely our investment in the Peninsula Istanbul due to unforeseen delays on that project as well as uncertainty with respect to the market recovery and certain currency impacts, all on top of the COVID situation. And also the Peninsula Manila due to the disruption caused by COVID and that impact relative to the relatively short remaining lease term on that asset of just over six years. We also reported an unrealized loss on our revaluation of investment properties, principally attributed to the Peninsular Arcades in Hong Kong, Beijing and New York, as well as the Peak Tower on weaker retail market fundamentals. Including these, the group's loss attributable to shareholders for the period was $1,197,000 If we exclude those non operating items, however, the underlying loss was $499,000,000. I will now run through our divisional contributions. The hotels division was understandably the most acutely impacted by the pandemic. We experienced a 60% decline in our combined revenue due to both sharp decreases in hotel occupancies for those that remained open as well as the temporary closure of six Peninsula hotels during the period. In response, we implemented proactive cost control measures. However, it was insufficient to offset the revenue shortfall. The combined EBITDA loss for the Hotels division of $3.00 $1,000,000 compared to a positive EBITDA of $390,000,000 in the same period last year. Our Clubs and Services division was also significantly impacted. The Peak Tram suffered a 74% reduction in its revenue due to significant decrease in tourist arrivals. Combined with the temporary closures of the Thai Country Club and the Quail Lodge and Golf Clubs Club, the Clubs and Services division reported a 55% reduction in revenue and sustained an EBITDA loss of 49,000,000 This is compared to a positive EBITDA in the same period last year of $5,000,000 Due to the contribution of Mooncake sales from Peninsula Merchandising, this division's contribution is typically skewed to the second half. The Commercial Properties division was the least affected. Our residential and office leasing was largely stable, whilst the majority of the decline came from the Peak Tower, which suffered both from a substantial decline in Sky Terrace visitors and also we needed to extend rental relief to a number of tenants. Overall, the division's revenue declined by 16% and EBITDA decreased by 12% to $236,000,000 As mentioned, we implemented substantial cost saving measures, which reduced overall group operating costs by 34% in the first half, with more substantial savings achieved in the second quarter. This was achieved through a combination of voluntary unpaid leave, reductions in casual labor, redeployment of staff, a hiring freeze. And for the closed hotels, the majority of employees were placed on furlough. We were able to utilize government subsidies where made available in certain operations and we significantly cut back on operating and corporate level expenses and as mentioned also renegotiated contracts where possible. Turning to our cash flow. As mentioned, EBITDA for the first half of the year was $95,000,000 negative $95,000,000 Net cash used by the operations for the period amounted to $55,000,000 after taking into account changes in working capital and taxes. I think it's worth noting that a number of the negative working capital movements that we saw in the first half related to 2019 expenses, such as deferred tax payments, bonuses and dividends, which we don't expect to be repeated in the second half of this year. Whilst the group continues to invest in its asset portfolio, we have deferred all non essential CapEx on existing assets. During the first half of this year, $844,000,000 was spent on new projects and £174,000,000 was invested in existing assets, which includes both the Peak Tram upgrade project and the Peninsula Hong Kong Arcade project. Most of the CapEx that was still spent on existing assets was either revenue of ROI generating or these were commitments from prior years from 2019. Our total cash flow will remain negative in the near term as we manage through the pandemic and continue to ramp up investments in the new hotel projects as well as the Arcade and Peak Tram upgrade projects previously mentioned. Looking at our balance sheet now. During the period, net borrowings increased by approximately $1,500,000,000 to HKD 8,300,000,000.0 with an average duration of our debt of two point four years. The group's net external debt to total assets remained at a modest 16%. Due to the losses sustained during the first half of the year, our cash interest cover was a negative 2.4 times. Looking forward, due to our significant capital commitments, we expect our gearing levels to continue to increase. From 2022 onwards, we expect gearing to improve as we look to deleverage with the receipt of the sales proceeds from the London apartments, which are held in escrow until completion. In terms of our capital commitments and funding, as at the June 30, the group's undrawn committed facilities and cash at bank and in hand amounted to $7,500,000,000 and $581,000,000 respectively. The group is also in the process of negotiating a further $810,000,000 of lines and they're presently in documentation stage. Given the group's liquidity position, we believe we have the ability to meet our working capital requirements for the foreseeable future as well as our various capital commitments, including our three hotel projects and other projects, which we estimate to be about $6,600,000,000 as at period end. Our key focus remains managing costs, managing our group liquidity and a return to positive EBITDA. Let me now hand over to Gareth and Martin to talk about the operations. Thank you, Matthew. Good afternoon. The Peninsula Hotels were severely impacted by the stringent travel restrictions, social distancing, and quarantine measures that were put in place around the world. The magnitude and speed of COVID nineteen's impact is evident in the RevPAR decline experienced by the hotels during the first two quarters as is shown here. Our hotels in Greater China first felt the effects in late January. Outside of Greater China, our hotels started the year in a strong position but experienced a sharp deterioration in demand as the pandemic spread on a global scale. As a result, beginning in March, we temporarily closed our Peninsula hotels in Tokyo, New York, Chicago, Paris, Bangkok and Manila. Subsequently, the Peninsula Tokyo reopened in June, the Peninsula Paris partially opened their food and beverage operations in June, and the Peninsula Chicago reopened in late July. In response, we've exercised significant cost control and cost cutting while maintaining appropriate operational and service levels as well as looking after the well-being of our staff. For the properties that are open, we're focused on driving both local and domestic demand. As part of our group marketing campaign, we've launched the Eight Loves of the Peninsula, which allows guests to enjoy special packages as well as an array of curated experiences to showcase the best of The Peninsula and the city in which it resides. In our home market, we formed an alliance with seven other Hong Kong headquartered brands known as the Heritage Tourism Brands to showcase Hong Kong's unique advantages as a tourism destination and to inspire love for the city amongst the local residents. For the properties that remained open, the Peninsula Hong Kong posted an 87% decline in RevPAR during the first half. But supported by commercial and office leasing revenues, overall revenue declined less by 54%. The Peninsula Beijing was one of our first properties impacted in late January, experiencing RevPAR decline of 74% in the first half. We had started to see some pickup from the domestic market in May and June, but this was unfortunately impacted by the second wave of the virus, and we continue to monitor the situation closely. The Peninsula Shanghai likewise posted RevPAR decline of 74% with revenue down 58%. In June, rooms revenue and food and beverage revenue started to show some signs of early recovery from primarily the local and domestic market. The Peninsula Beverly Hills had a satisfactory first quarter during the traditional peak award season but has since been significantly impacted by the shelter in place restrictions implemented by the California state government. We are evaluating the timing and feasibility of reopening the hotels that still remain closed. I will now hand over to Martin to talk about the Commercial Properties and Clubs division. Thank you. Thank you, Gareth, and good afternoon. The Repulse Bay complex reported a slightly weaker first half compared to last year, but it was pleasing to see leasing revenue remaining stable, but food and beverage and catering decreased due to social distancing measures. The shopping arcade was 93% occupied. At the Peak Tower, we experienced a 62% drop in revenue due to the substantial decline in visitor arrivals to Hong Kong. We've implemented a number of sales and marketing strategies to continue to drive business and encourage local residents to visit the peak. St. John's Building was fully let during the 2020, and revenue increased by 1%. The landmark in Vietnam reported stable revenue. Revenues at 21 Avenue Clabert in Paris decreased by 7% due to some rental concessions and one vacant retail space. In the Clubs and Services division, the overall revenue of the Peak Tram decreased by 74% due to the impact of the coronavirus, which significantly impacted tourist arrivals in Hong Kong. The upgrade project has also been negatively impacted by the pandemic in terms of the sourcing of materials and production delays in Asia and in Europe, which has affected the manufacturing of the new tram cars and the equipment. We believe this will affect the project in terms of its scheduled completion, and we have postponed the second phase of service suspension until 2021. The entire upgrade project, however, is still planned to be completed in 2021. The Thai Country Club was temporarily closed from March to May due to government imposed restrictions. The club reopened in May following the relaxation of provincial restrictions. However, business remained soft compared to the previous year due to the travel restrictions still in place in Thailand. The Quail Lodge and Golf Club revenue decreased by 55% due to the shelter in place restrictions in California and a debt reduction in membership fees for golf club members. The hotel and club facilities temporarily closed in March 2020, although the hotel has reopened on the June 17 and business has been strong since reopening with the staycation market in California proving to be very popular. Revenue at Peninsula Merchandising was 58% lower due to softer retail sales and the temporary closure of the Hong Kong International Airport boutique. Despite the general economic uncertainty, early orders for the mooncake season have been satisfactory. I will now hand back to Clement to talk about our new projects and the outlook for the remainder of the year. Okay. Thanks, Martin. For the Peninsula London project, As a result of the pandemic, we had to temporarily close the construction site in March to ensure the safety of our employees, contractors and suppliers. The site reopened in May 2020, and we're working hard to mitigate the impact of this closure. However, the continued pandemic has meant to reduce capacity of the workforce on-site. Social distancing measures are still in place and the supply chain has been affected. And hence, we expect delays to the project, which we're not yet able to quantify exactly. For sure, the revised opening date is going to be now delayed to 2022. But until we see what the outcome will be with the social distancing, we cannot provide an accurate revised timetable. For the Peninsula Istanbul, that construction site was closed in April, and that has also reopened, albeit again with restricted working. And that has also led to some unforeseen delays. Progress, however, is not too bad. We're still expecting completion of the project in 2022. For the Peninsula Yangon, the site has remained largely open during this period, but nevertheless, construction works have been impacted by COVID restrictions and also the supply chain has been significantly affected as well. As a result, the project also is experiencing some delays and we are also expecting completion in 2022. So you see at the moment, all three hotel projects are expected to complete in 2022. So we're going to be rather busy that year. The final slide is on the outlook. And obviously, where we sit, it is not possible to predict when COVID will come to an end and what the trend is going to be. Certainly, in Hong Kong, which is the base of most of our operations, whereas the situation seemed to be a lot better in May and June, by July, a lot of the restrictions were back in place following another wave of infections. So at the moment, the outlook for us in Hong Kong immediately is negative. We're also looking long term and thinking of what our company is going to look like post COVID. And of course, within that, in our home market for Hong Kong, we've seen a fair amount of geopolitical instability as well. So we're doing some longer term planning to think of how the group is going to look and how we would best position the group for the future after COVID and hopefully with the stabilization of the political situation in Hong Kong. Unless there's a material change in the remaining months of this year, our group would be expected to make a group EBITDA loss for the year as a whole. Despite this difficult situation, we continue to focus on new strategies to drive business for the longer term future and hopefully to leave the company as a better company for the future. With the rapid development of technology, we have been looking at various ways to take advantage of technology transformation. We've done a lot in the areas of digital and things like this. And with that strong development of the technology side, we're widening our initiatives to cover a more innovative approach and to look for more innovations. We are also looking at business diversification, exploring opportunities to create value from horizontal and vertical expansion and the adjacencies which are supported by our existing strengths and competitive advantages. We, of course, continue with our corporate social responsibility program, and we're also looking at how to improve our future workplace for future generations. We've already mentioned the new hotel projects in London, Istanbul and Yangon. There's a huge amount of resources and investment being put into these projects. And it is quite challenging to deliver those projects in the current environment. But once they complete, we believe that these hotels will further enhance our brand presence when they open. Our P TRAN business, unfortunately, is very, very soft at the moment and will continue to be negatively impacted in 2020 as long as the visitor arrivals remain so low. However, again, we believe that this major improvement and upgrade program, which as people know, will significantly increase the capacity of our tram cars will improve will provide a much better visitor experience, will enhance Hong Kong's tourism image, and we believe that we'll see a lot of growth once we have this new product and things come back to normal. Overall, our company has maintained a strong balance sheet and has closely maintained its liquidity position during this crisis. We're fortunate to have a highly motivated and dedicated team of management and staff who are committed to our long term vision. So that ends our presentation. Clearly, very challenging circumstances, but I hope we've shared the various actions that we're taking in response to this crisis that we're facing. And of course, we would be happy to answer any questions. And Judy, I'll hand over to you to be emcee for the questions. Thank you, Clement. We have, one question from Bank of America Merrill Lynch, Ronald. He would like to know if you could provide some color on the recovery trend in China. Okay. Well, I would say of our Peninsula Hotel properties, the one that's performing the best at the moment is Peninsula Shanghai, where we're now regularly seeing occupancy rates of over 50%, which is in stark contrast to any other property that we have. And the reason for that, we believe, is that domestic travel in China for the time being has resumed quite well. We understand that other than a few regions, generally, people are able to travel domestically. In Beijing, the recovery has not been so good because there was a threat of another wave of infections and then the restrictions have been more severe in Beijing than Shanghai. In Hong Kong, as mentioned, things were looking better in May and June. But by July, with another wave of infections in Hong Kong, which was up to over one hundred a day, but less than one hundred a day for the past couple of days, then the government has imposed quite severe restrictions for the time being. So until we see what happens with the lifting of those restrictions, it's going to be very difficult to forecast what the outlook of Hong Kong is going to be. Thank you, Clement. A follow-up from the city analyst closer to those lines as well. Do you expect a further deterioration or a chance of improvement in the second half from the first half for different regions? When do management expect to see a recovery to pre COVID levels? And could management share latest recovery trend in different markets? Well, obviously, it's very difficult for us to forecast what's going to happen because that would depend on rates of infections and government restrictions and so on. Maybe what I can do is besides the properties I've touched on, which are Beijing, Shanghai and Hong Kong, I can make some comments generally. In Tokyo, as has been mentioned, the hotel has reopened. There is a certain amount of business, which is all domestic. There's virtually no international travel. But the recent concern is that the hit cases may be rising again in Tokyo. In Bangkok, the cases have been low. However, there are many, many travel restrictions and the hotel remain our hotel remains closed there. In Manila, the hotel also remains closed. And our understanding is that the cases are still increasing and the COVID situation is still at quite a crisis level in Manila. In The U. S, it varies a little bit from place to place. Chicago, we have reopened. We're seeing some business there. But in The U. S, as people are aware, there has there are also some issues of social unrest in addition to COVID. So the pickup has been actually pretty much in line with our expectations, but weak. Our expectations were low. Peninsula Beverly Hills remained opened and actually was doing a certain level of business, but more recently, the COVID situation has gotten worse. In New York, the COVID situation has gotten better, but the economics of operating in New York are still challenging. And so people are still looking at that. And in Paris, as mentioned, only the FNB has reopened. So in terms of predicting recoveries, it's really too early to say anything very concrete. What we're doing at the moment is to control the cost at the best we can. And quite honestly, at this stage, if and when COVID goes away, we do not know quite what the trends and the numbers will look like for international travel. So we're having to remain pretty vigilant and pretty flexible to deal with the circumstances as they come along. Thank you. Another question with regards to strategies on promotion. So what kind of promotion or strategies we are planning to tackle the weakening sentiment in the region? Related to that is how are our staycations able to sort of offset our lost revenue from the hotel side? I mean, obviously, what business we're able to get in the hotels is all from local or domestic business because international travel is either not allowed or heavily restricted, okay? So needless to say, all of our revenue generating efforts are focused on the local market. And I heard Gareth talk about the Eight Loves of the Peninsula, for instance, which is one example of such a local package. I would say generally, Peninsula is well liked by locals and there tends to be quite a good level of interest in local staycations. But of course, one would appreciate that when the government mandates the closure of restaurants and swimming pools and so on, then that makes staycations, not attractive either. And so with the latest increase in restrictions in Hong Kong, the local staycations business has reduced as well. So yes, I mean, we're certainly doing what we can to stimulate what revenue generating opportunities there are. But the target market is only within the local market and also the effective room rate of packages like that would be a lot lower than our usual average. Thank you. Next question. Does management have an expected opening time for hotels which still remain closed? Well, we mentioned already, they've all been affected sorry, new projects or the hotels that Remaining. Remain the answer is as soon as possible. But what we're having to monitor constantly is what demand we think there's likely to be if we reopen the hotel, what risks there would be in terms of health and safety if the hotel was opened and also what arrangements there are in place, for instance, in the form of government subsidies and so on for staff who are furloughed. So we then weigh that up, if you like, in terms of both health and safety balance and an economic balance. And this is based on those factors that we decide whether to open or not. But it's not possible to predict an exact timing, as I said, because it's so difficult to predict what the trend of COVID is going to be. If the question was related to the new hotel projects, we had already touched on those earlier during the presentation. 've been all affected to some extent by COVID in terms of availability of workforce, either sites being closed or even if the site is not closed, then restricted working on sites because of COVID restrictions. And so if you like, with that reduction in productivity on-site, there was nothing we could do to avoid some delays. We are working to mitigate delays where we can, such as by extended working hours, which is possible in some places. But the net effect is going to be that we're not going to be able to completely overcome the delays. And hence, I mentioned earlier that off projects are now looking at 2022. Perhaps if I could just add a comment on the economics of the closed or open hotels. So generally, what we see is that we are better off having the from a purely economic perspective, we're better off having the hotels open if we can achieve a anywhere between about a 10% and a 20% sustainable occupancy level. So that's one of the benchmarks we look at. Now that's just to reduce the cash burn relative to the property being closed. To get to an actual EBITDA breakeven, the threshold is much larger. It won't surprise people that, that threshold occupancy level is lower in Asia, but generally tends to be higher in North America and Europe. In relation to that, another question came in is what is the latest monthly operating costs related to cash burn? Well, we have disclosed that our costs for the first half year are down about 35% as compared to the year before. So I think that is the information that I can give. Matt, have we disclosed our cash burn number? No, we don't. I would probably refer people to the cash flow statement and the operating cash, although included in that number, we have this payment. So if you look at our net cash generated from operating activities, it was a negative $635,000,000 However, inclusive of that in that number is payment for properties under development for sale. Now I consider that as a capital item, okay? So if you back that out, we get to $455,000,000 negative operating for the period. Now a simple division of that by six dollars is going to be too great a number. And it's too great a number for the reasons that I mentioned before. Some of that is working capital changes, which were the consequence of 2019 expenses. So that included, as I mentioned, deferred tax from 2019, it included a dividend payment and it included a bonus payment. Basically, those are timing differences. So they're all timing differences. So I guess you start if you're looking at the numbers, you start with that $455,000,000 you divide it by six, but it's not that great. It's somewhere between the EBITDA loss and that number. Thank you. I think last question related to the new strategies. What kind of horizontal businesses are we looking at? Well, I think the best example of what we've done before was Mooncakes. And actually, Mooncakes, I've been reminded, was a business that developed from an operational initiative to create the Mooncakes and then the momentum continued and it was built up. Now, of course, if we can conjure up something of the success of Mooncakes all the time, we'd be very, very happy, but it's not that easy to find. But what we're putting in place is a more sort of organized process to look for ideas and to find ideas of things that we could develop. Now at the moment, we are quite capital constrained because of the three hotel projects. So ideas we're going to have will have to be pretty capital light. But the sort of example would be Mooncakes. And we have a team that's been coming up with other ideas that we're processing as well. But if anyone has any ideas that they would like to send in by way of a sort of suggestion box, Judy would gladly receive any other suggestions. Okay. I think that's all we have for today. So thanks, everyone. Please know that these slides will be made available for download on our website later today. If you have any further questions, please write to us at our IR mailbox. And with that, this concludes the Hong Kong and Shanghai Hotels 2020 interim results analyst presentation. Thank you for joining us. Thank you. Thank you.