Earnings Call: H2 2018

Mar 14, 2019

Welcome. Good to see you all. Our final results were announced to the Stock Exchange earlier this afternoon. Peter Bora, COO and Matt Lawson, CFO, you know already. The disclaimer statement you are very familiar with, so no need to go through that. Overview, I think we're pretty happy with the results. It wasn't an easy year. Obviously, a lot of big uncertainties around the world at the moment such as the trade war, Brexit and things like this. Pleased pleased the And to celebrate that we are are very the only and the first hotel group in the world where all of our hotels have been rated Forbes five star. And nowadays, of course, there are many hotels that call themselves five star, but the Forbes five star award is a very specific award that is only given out after a very stringent set of criteria. And we are the only hotel group that all of our hotels are Forbes five star. So we're very pleased about that. Before going into some of the financials and so on, we thought we would just run through some of the milestones that we're putting into our annual report, which gives you a bit of color of what is happening around the group. Some of this is a bit more lighthearted than other stuff. But here, the photo on the left is Pete Tram. We'll talk a little bit more about the extension of the operating right for another ten years and the expansion project, which you're aware of already, but I'll update you on that. The two photos on the right, of course, depict Peninsula London. The photo on the top right was actually taken by me of And see The next slide, top left is the Zeeba in Chicago, which for us is quite interesting. It's a new F and B approach that we've taken. We've brought in mixologists and a new sort of marketing campaign, a lot of social media, e commerce, influencers and stuff like this and it's all working pretty well. Top right, the annual report last year effectively won the world's best annual report. At the ARC Awards in New York, it beat off all of the big U. S. Multinationals and so on to be awarded Best of Show. Bottom left hand photo is a bunch of people receiving the BRIM certification in Beijing, which I understand is the first time BRIM for sustainability has been awarded for a new renovation of a hotel. And then bottom right is the relaunch of the Peninsula Merchandising boutique line, which occurred middle of last year and it's been performing pretty well. So new packaging, new products and of course, you can go and buy some of that stuff at either the Peninsula Hong Kong shop or the airport shop. Or online. Or online. Sorry, forgot that. The next page, well, the Peninsula Hong Kong celebrated its ninetieth anniversary. We did a number of things. But for instance, one of the things we did was we now have a Peninsula yacht in Hong Kong that customers can go and enjoy the lights, go for a sunset cruise and so on. It's all very peninsula style. I've been on it. It's very nice. Top right hand photo, this is our startup program. We had a pitch night for some of the startup businesses that had applied to be included in our program, which we're running together with the Stanford Research Institute. And we selected two winners that we're actually working with at the moment in our lab in Aberdeen to develop an innovative new product together with us. Very exciting stuff to be with some young entrepreneurs and talking to them about innovation. Sustainability, that glass of lemon tea is showing you that it doesn't have a straw in the glass. And we have imposed that as part of our campaign against single use plastics. We do provide paper straws on request, but we're eliminating. And we're working on other types of plastic as well. This is only one category that we're starting with. The next one, Peninsula New York thirtieth anniversary art pieces including by Andy Warhol. And on the right Peninsula Bangkok's twentieth anniversary where we offered some cultural experiences for our guests. In my in your press pack, you will see that I have slightly changed the format of the CEO statement this year. In the past, it was more in the nature of an operational review. This is a more strategic statement. Please read through it. I obviously don't have time to run through the whole statement. But within that statement, I think we can mention a few things. Obviously, our overall vision is still to develop and operate a small number of the highest quality hotels in the world. And actually, we there are a lot of changes going on in the world with technology and so on. But we believe that the fundamentals do not change. What people care about is personalization, attention to detail, graciousness, hospitality, guest recognition, all of those factors are the key things that we work on. Technology is to enable better service. So I have already mentioned that we set up the Technology Transformation Committee. And within that, we're looking at digital marketing, social media, data analytics, guestroom technology, back of house technology, robotics, financial systems, HR systems and quite a wide range. So but we see technology as an enabler for us to provide better service, not the other way around. Never say never, but we do not intend to have robots serving guests. China is important. So we're emphasizing China. We're doing a lot of work to try and improve our reach in terms of sales and marketing in China. That's something we're working on. And for instance, we're looking at opening some more Peninsula merchandising shops in China. So that is something we're looking at. Obviously, the Greater Bay Area is something that people are talking about. So we're looking at what we can do. No plans to open a Peninsula Hotel in the Greater Bay Area for the time being. But shops certainly would be a possibility. And people, obviously very important. And as always, we do a lot in terms of training, career development, empowering staff, cross exposures and the whole works. And as a result, we enjoy pretty good loyalty. Staff turnover numbers are relatively low, but more importantly, the long service amongst our key managers is very high. So as I said, some of that stuff is encapsulated in the CEO statement. Okay, Matt, can you please do a quick summary of the numbers? Certainly. Thank you, Clement, and good afternoon, everybody. Starting with a few key highlights. Our revenue was up 7% year on year to $200,000,000 and our EBITDA was up 9% to 1,550,000,000.00 If we look at our earnings growth across our businesses, it was fairly broad based. And then it was further assisted by the fact that we had a full year of operations from our newly renovated Peninsula Beijing hotel. And we also had a full year's rental contribution from 21 Avenue Clabea, which is our office and retail property adjacent to the Peninsula Paris. Our underlying profit came in at 765 million, which was 4% lower than last year. But it's important to remember this number includes the gain on the share of the apartments sold in Shanghai, of which we have a 50% interest. So if you strip that out to get a better view of our underlying earnings from our operating businesses, you'll see that, in fact, we increased our underlying earnings, excluding apartment sales, by 14%. So the $742,000,000 for the year, which we think is a credible result. Our total assets is edging closer to GBP 50,000,000,000 and whilst our net debt to assets remains very conservative at about 12%, which is up one percentage point from last year. Despite having slightly higher net debt, in fact, we saw cash interest cover improve over the period to close to 13x, and that was a consequence of having higher earnings. And then finally, we've declared an interim dividend of $0.16 which takes our full year total to $0.21 That's up $01 or 5% on 2017 numbers. As I just mentioned, growth was broad based across not only all of the divisions, but also all of the geographies in which we operate. So our largest revenue contributor continues to be Hong Kong, and you can see by the chart there, it's up 4%. Hong Kong is always going to be a little bit more stable because of our comparatively large commercial property portfolio here in this market. Other Asia was very much boosted by return of Peninsula Beijing to full room inventory. And The U. S. And Europe generally performed well. Peninsula Chicago is benefiting from its new room renovation, also from the opening of the new bar. And Paris market generally also saw recovery in Europe. If we turn now to the results of each division, the hotel division continues to be the main contributor group's results. It's accounting for about 60% or 58% of our combined EBITDA. But as this chart also illustrates, it was also the main contributor to our earnings growth in 2018. Generally, across the hotel portfolio, we saw good growth in our rooms division and we saw good growth in our food and beverage. Retail over the past several years has been challenging. But I'm pleased to say that in 2018, we're starting to see positive rental reversion. So not yet reflected in the gross rental numbers, but we are starting to see positive rental reversions after many years of negative rental reversions. The Commercial Properties division performed well. We saw strong contributions from the Peak Tower, for example, also St. John's Building here in Hong Kong. I've mentioned 21 Avenue, Kleber, and the Repulse Bay was fairly stable. Within the Clubs and Services division, Clement's already mentioned with Peninsula Merchandising, we relaunched our products in the middle of last year and that had a positive effect on their earnings. And the Peak Tram is benefiting from the new rail and also bridge linkages into the Chinese mainland. So looking at our cash flow statement, the theme for cash flow is very much as I've communicated last year or in our interim. And that's really that our capital expenditure is shifting from our existing assets and starting to ramp up on our new hotel projects. Our after tax net cash generated from operating activities for 2018 amounted to $1,380,000,000 of which about $430,000,000 was applied to fund CapEx existing assets. About $1,200,000,000 was spent on new projects in 2018. And so our net cash flow for the period was less than $100,000,000 And I think that's a credible amount given the sheer amount of construction going on. And what it tells you is that not only did our not only were we able to comfortably cover our CapEx existing assets from existing operating cash flow, but also the majority of the spending on our new projects. So this slide shows our borrowings and our key debt ratios. I think people who have been following us recognize that our company's approach is to be conservative with respect to our capital structure, and we really see this as a defense against potential unforeseen volatility or stress in the markets in which we operate. So during the period, our net borrowings increased by 7% to $5,900,000,000 and our net debt to total assets, as aforementioned, increased to 12%. The increase in the debt, obviously, mostly attributable to the new hotel investments. Our cash interest cover, as I've already said, has improved over the period. Our weighted average interest costs remain low and fairly stable at 2.3. And in terms of derisking the balance sheet, we've also locked in about 73% of our total borrowings. Looking forward, we do have significant capital commitments across portfolio. Our future capital commitments are about $8,600,000,000 over the next four years or so. Our leverage is likely to peak sometime around 2020 before we recognize the sales of our apartments in London. So just finally, if I'm to leave you with three key messages, it is that our earnings growth was broad based and across all regions and all divisions in which we operate. Our capital expenditure on our new projects will continue to increase. However, we're going to continue to actively manage spending on our existing assets. And then finally, we are in a strong financial position, not only to manage through this large capital expenditure program that we have forthcoming, but also to protect ourselves for any unforeseen events. Now I'd like to hand over to Mr. Peter Bora to talk about operations. Thank you, Nancy. Good afternoon, ladies and gentlemen. During the year, the Peninsula Hong Kong was the market leader in average room rate, and we saw a strong improvement in RevPAR. The Peninsula Arcade was 87% occupied, and the leasing momentum was positive. The Peninsula office tower continues to perform well and was 97% occupied throughout 2018, and the immediate outlook is stable. The Peninsula Shanghai remains the market leader in average room rate in the city. Also, the hotel reported a softer 2018 in terms of occupancy in RevPAR due to very intense competition and many new openings. The Peninsula Arcade was 89% occupied for the full year, and the recent leasing momentum has again been positive with some exciting new couture brands opening shops in our arcade. The Peninsula Beijing RevPAR and occupancy showed positive growth year on year following the renovation. We were the rate leader in our competitive set for 2018. The Peninsula Arcade has retained most of its top luxury tenants and has welcomed chic new luxury boutiques into the arcade. The Peninsula Tokyo twenty eighteen operating results were positive, the best results actually since the hotel opened ten years ago with improved RevPAR positioning, average rates and increased occupancy. And we're optimistic for the coming year as visitor arrivals to Japan continue to be healthy in the run up to the Rugby World Cup in 2019 and the Tokyo Olympics in 2020. The Peninsula Bangkok reported double digit growth in RevPAR and improved occupancy following the end of the one year mourning period for His Majesty King, Bhumibol Al Uech of Thailand. In the second half of the year, Bangkok was affected by a sharp decline in Chinese mainland arrivals following a tragic boat accident in Phuket, which led to reduced group tourism to the entire country. The Peninsula Manila occupancy and RevPAR saw a healthy increase over the same period in 2017, so there was a slight decline in average rates. The country's economy continues to be one of the fastest growing in Southeast Asia. The Peninsula New York reported an increase in revenue, average rates and RevPAR over the previous year. Also occupancy remained flat. Our food and beverage performance was soft. Although Clement restaurant and the hotel's roof to bar, Saint Honenin performed well, and the latter is consistently rated as one of the best bars in New York. The Peninsula Chicago reported a pleasing year with a double digit increase in RevPAR, achieving RevPAR an average rate leader despite significant new supply in the city. Amidst intense competition, we were delighted to receive the Accolade as the number one best luxury hotel in The United States by TripAdvisor, which is a testament to popularity of the hotel following its extensive renovation in 2016. And as Clement mentioned, we opened a beautiful new bar. The Prince of Beverly Hills was once again voted best hotel in The U. S. By Global Traveler magazine in 2018. The hotel reported softer rates and a decreased revenue over the previous year, with occupancy declining slightly. Leisure travel to Los Angeles and food and beverage revenue was negatively impacted by an unusually cold and rainy winter spell. In 2018, Paris saw a record tourist arrival and improving sentiment for the first half year. Also, the Chile Jean protests unfortunately affected the city in the fourth quarter. This also impacted our operating results as some of the protests occurred in the very immediate vicinity of our hotel. We believe the situation has calmed, and we're cautiously optimistic for the outlook of 2019. Overall, the Peninsula Paris reported improved results with a double digit increase in RevPAR and improved revenue, occupancy and rates despite intense competition from the other Palace hotels in the city. And now back to Clement. Thank you, Peter. I'll quickly cover the other two divisions. Commercial Properties, of course, the largest property is one you know well, the Riphouse Bay Complex, where things are pretty steady. The luxury residential market is actually quite stable and our occupancies are good. And actually, the outlook is pretty good at the moment. So I think that's actually something I'm pleased about for Hong Kong generally to see that sort of trend. The Peak Tower, the retail was fully leased for most of the year with revenue up by 3% and the visitor numbers to the Sky Terrace were very healthy. They reached record levels compared to the previous year. Clubs and services, the most important businesses there are the Peak Tram firstly, where revenue was up by 10%. As I mentioned, the operating rate has been extended to 2,035, but that is subject to us undertaking the upgrade project of the Peak Tram. Slide. Next next next And And lot seeing a second 19. Growth the And from then the old half station, of one would go up escalators into the new platform for the new tram. So this will take the queuing away from Garden Road. So all those big queues you see on Garden Road will be going inside the former station. And of course, we have greater revenue opportunity with the larger tram cars. However, we will need to suspend service for two periods, one this year and one next year in that construction. So there will be some disruption to the existing Peak Tram business, although of course as you would expect, we are making arrangements with other transport providers, so that people will still get up to the Peak Tower and the Sky Terrace during that time. The first service suspension will be about two point five months. And we have not yet announced the exact date. Merchandising business, I talk about quite a lot, because that is a growth business for us. Revenue 9% higher than last year. And as I mentioned, we're looking at our China expansion there. And actually, the Peninsula Boutique at the airport does pretty well nowadays. New hotel projects, you're familiar with these. London, pounds 189 rooms, 26 residential apartments, construction budget GBP $650,000,000. The main thing to explain here is that in many projects, what you do is you dig a big hole, you build the basements and then when you finish the basements, you build the superstructure. We're not doing that. We're doing what is called the top down approach, which means that you build up and down at the same time. So you build this great slab that you can take the weight and you build the superstructure and you go down at the same time. And what that means is that we're actually going to top out middle of this year. Actually, if you go to London now, you can see the building coming up and large holdings already in place. But with the topping out, there's still a lot of work to be done in the basements because of the top down. And so although you will see the superstructure already in place, it will take a bit of time to finish it and that's scheduled for 2021. East Anbu, again, you're familiar with this 50%, million project cost for the entire joint venture, 180 rooms. And then it's got all these beautiful gardens and swimming pool and so on, on the Bosphorus. Basically, it's not an easy project. You're building right on the shores of the Bosphorus. You're dealing with three heritage buildings and sometimes you find things that you might not expect. So we're having to deal with all of that. We are we have been improving our project management as well. And so the project keeps on progressing. And completion, we're now targeting for 2021, which is later than the original expectation because of many of the heritage and construction issues we've come across. But we're still within the budget that we had set. Peninsula Yangon, the project is about USD 130,000,000, 70% interest and 88 guest rooms. You're all familiar with this beautiful colonial building with the high ceilings. I'm not sure people have seen this design drawing before, but you can see, hopefully, it will be very beautifully done with this colonial feel. Unfortunately, during 2018, I forgot whether this was before or after we announced the interim results, but a section of the heritage wall fell down. Some of the old laterite was not very strong and when it was raining very badly, part of it fell down. So that has led to some delay, but we have reaffirmed the construction methodology. We have gone back to the authorities to seek all of the approvals that we need and the project is coming back on track. We are dealing with an insurance claim that has not yet been finalized. But again, that one is scheduled at the moment for completion in 2021. So you will notice that we have quite a lot being completed in 2021, which will be a lot of work for Peter. Sustainable luxury, I'm delighted to mention that our Head of Sustainability, Janice, was awarded the ED Sustainability Leader of the Year, which apparently is a big award to win in the sustainability world to recognize her strategic approach to sustainability. All I would say is that we are well on track with our Vision 2020. 85% of the objectives that we set for ourselves have been met. We're working on the remainder. I mentioned earlier the BRIAM award in Beijing and just a number of programs which are ongoing. In fact, one of the main things now is to think about what our vision is going to be beyond 2020, because of course we want to extend and have a new vision once we once the existing vision has been more or less delivered. Outlook, I think we've talked about a lot of this already. Difficult to measure it because if someone hasn't booked, they won't necessarily tell you to say I would have booked if not for the trade war. So we don't have precise numbers. But definitely, we clearly don't want to trade war. We think our business would be better, of course, without. But nevertheless, our businesses are pretty stable at the moment despite the environment that we're seeing. Hong Kong, think, we do think that generally more people coming to Hong Kong, more tourism is good for us. So things like the Express Rail and the Bridge are good. In Japan, things like the Rugby World Cup and the Tokyo Olympics are good. And basically, we will continue to push Beijing following its renovation. We hope that Paris will calm down with the yellow vests. And further ahead, of course, we're looking forward to the openings of London, East Temple and Yangon. I mentioned already that the both the retail shops lettings and residential lettings is not looking bad at the moment. And we've already mentioned the peak tram that there will be some earnings effect from some suspension there. But overall, I think we're doing pretty well. Our financial position is strong. I think our management team are motivated and dedicated in good spirits. And so I think things are going quite well for us. I'm obviously very appreciative of all the hard work and the contributions of my team