Welcome to the Scandic Hotels Group. Q2 Report 2023. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. Now, I will hand the conference over to the speakers, CEO, Jens Mathiesen, and CFO, Åsa Wirén. Please go ahead.
Thank you very much, and good morning, everyone. First of all, also thank you, all of you, for joining Scandic's presentation of the second quarter 2023 on a busy reporting day. My name is Jens Mathiesen, and I'm the CEO of Scandic, and like was said, together with me, I have Åsa Wirén, our CFO, and we will take you through the quarter together. Firstly, I would like to start off with wishing everyone at Scandic a happy birthday, because today, actually, Scandic turns 60 years. It's been six decades since we, on July 14, 1963, opened our first Esso Motor Hotel in Laxå, in Sweden.
We have actually gone from 1 hotel, you would say 1 roadside hotel, to 269 hotels in operation in 6 markets, with nearly 56,000 hotel rooms and over 19,000 team members. This is quite an achievement. Therefore, both Åsa and I are maybe a bit extra happy today to present the second quarter on this 60th birthday. With that said, please turn to page 2, and we'll jump straight into some highlights of the quarter. I'm very pleased to present another strong quarter. The market development was strong in the quarter and with high demand and continued positive price development. Demand was on high levels from both leisure and corporate in all our markets, and we actually reported an all-time high RevPAR during this quarter.
The occupancy rate was 63, which was on par with the second quarter last year, and it was in line with our guidance. We have an average of just over 3% more rooms in operation compared with the second quarter last year. This means that we sold more rooms than we did last year. I'm, of course, very proud of how we have met the market commercially, that we run our hotels very efficiently, and that our guests are also very satisfied. We also delivered improved net sales and a strong result, which we will talk you through during this call.
Our financial position has improved to a strong level, and during the year, we have actually gradually increased the activity level and launched several initiatives with a commercial and data-driven focus to build a stronger Scandic. This includes initiatives within IT and commercial, skill development of employees, initiatives within health and well-being, and also our new brand, Scandic Go. Ultimately, this enables a faster growth and even improved margins. The establishment of Scandic Go, our newly launched brand in the fast-growing economy segment, is on the way, and we are keeping a high pace in all our markets to take a leading role in the Nordics. In the beginning of July, we also announced our second signing, which is also in downtown Stockholm, but this time in a part of the city where we don't operate any hotels today.
We have entered a very busy summer period. We expect a strong third quarter with high demand and increasing prices. All in all, this was a strong quarter. We are well positioned and very excited for a second half of the year. Please move to page 3, where you can see quarterly Adjusted EBITDA development since the beginning of 2020. We report an Adjusted EBITDA of SEK 772 million, compared with SEK 1,083 million in the second quarter last year. This is indeed a strong result. As you all know, Q2 last year was heavily impacted by positive one-offs.
Since the restrictions eased in 2022, we have continuously recruited and skill-developed more than 8,000 team members in order to meet the higher demand. As I mentioned, also, we have gradually ramped up the activity level within Scandic this year. Excluding one-offs, the Adjusted EBITDA margin improved significantly compared with the second quarter of 1920, 2019. Altogether, we report a strong result, driven by a solid market development in combination with a high efficiency. Also, we'll, of course, take you through the financial development later in this presentation, but please turn to page 4. Here you can see the monthly market occupancy in the Nordic countries. The market development was solid, with high demand from both corporate and leisure.
Scandic reported an occupancy rate of 63% in the quarter, which was on par with the second quarter last year. We are now beyond what we say is talking about the pent-up demand, now with 5 quarters with good demand in a row. Domestic travel and travel between the Nordic countries are at continued high levels. The lacking occupancy compared to 2019 is explained by lower volumes of intercontinental travelers still. However, this segment continues to recover. During the spring and early summer, the demand for entertainment has been high, with concerts, sports events, and other type of events that contributed positively to both demand and price development. Please turn to page 5. This is market data for average room rates for Sweden, Norway, Finland and Denmark, indexed still to the corresponding month in 2019.
We continue to see rising room rates well above 2019 levels. Scandic's average average room rate was around 15%-21% above 2019 levels in the second quarter, and 8%-10% above 2022 levels. Finland has lacked the other markets, but are as well recovering. Please turn to page 6. Here you can see the market RevPAR development, also indexed to corresponding month, 2019. The RevPAR development was strong in the quarter, with Norway continuing to be the strongest market at levels 20%-30% above 2019 levels. Scandic reached a new record level with RevPAR of SEK 828 in the quarter, which is compared with SEK 749 in 2022, and SEK 745 in 2019.
On average, we had just over 3% more rooms in the quarter compared to the second quarter 2022. Please turn to page 7. Last quarter, we announced, I would say finally, reannounced, you can say, Scandic Go, our new brand in the fast-growing economy segment. Our ambition is to take a leading position in the segment, and we keep a high pace to reach this ambition. In the beginning of July, we signed our second Scandic Go, a new hotel with 221 compact hotel rooms and space-efficient configuration. This type of property and hotel configuration enables higher share of room revenue and lower CapEx than a full-service hotel, and it is what we are looking for when in search for new locations and properties.
The hotel will open in late summer 2024, so after summer next year, following renovation and technical upgrades, and will be certified according to the Nordic Swan label. After the opening. Please turn to page 8. This was the pipeline at the end of the quarter. With our improved financial position and commercial approach, we keep a high pace to ensure growth while optimizing the portfolio. As the expansion of Scandic Go continues, we have a great interest from partners, landlords and property owners. We look forward to bringing more Scandic hotels to our markets. Looking forward to the second half of the year, we are increasing investment for renovations of existing hotels to create even a more competitive portfolio.
We are coming from a period, of course, focused very much on building a strong balance sheet. We can now grow from a position of strength. We are very determined to get back to our targets of a maintenance CapEx of between 3% and 4% of the turnover. We will continue to optimize our portfolio and add more hotels, as well as also exiting hotels with limited potential or low financial performance. We have very few hotels now with low financial performance. Also, as we communicated in the first quarter, we will between Q3 this year and Q2 next year, exit five hotels with a total of 731 rooms.
With that, please turn to page 9. I would like to pass it over to our CFO, Åsa Wirén, to take us through some financial numbers.
Thank you, Jens, and good morning, everyone. Please turn to page 10 then, and we will start off with the financials for the quarter. We deliver a quarter with improved net sales and a strong result. Net sales increased by 8% to SEK 5.7 billion, compared to the second quarter of last year. We report a strong result with an Adjusted EBITDA of SEK 772 million, corresponding to a margin of 13.6%, compared to 20.5% in the second quarter last year. I want to highlight that Q2 last year included SEK 261 million in one-offs, mainly related to governmental support and compensation related to the agreement with the Norwegian state for preparedness for housing of refugees.
We had low one-offs of SEK 20 million in this quarter, and the Adjusted EBITDA margin, excluding one-offs, was 13.3%, compared to 16.1% in the second quarter of last year. This was also a significant improvement, almost two percentage points compared to Q2 in 2019. We have a strong financial position, and as Jens mentioned in the beginning of this presentation, we have increased the activity level with several initiatives, with a commercial and data-driven focus to build a stronger Scandic. We will, of course, come back today to those initiatives later on over this year. This is partly reflected in higher central costs this quarter.
In addition to the one-offs, the gap in the results compared with the second quarter last year, is explained by the ramp-up of the organization, as we have recruited and trained over 8,000 employees since the restrictions eased in 2022. We are constantly focusing on the operating margin, and with a higher pace and more initiatives to further drive our commercial ability, digitalization, and of course, efficiency. In Q3, we expect one-offs with a positive Adjusted EBITDA effect of around SEK 20 million. This is related to housing for refugees in Norway. I also want to remind you that we had one-offs in the third quarter last year, of SEK 76 million. Please turn to page 11.
Free cash flow improved slightly to SEK 306 million, driven by higher turnover, improved results, and lower CapEx compared to the first half of last year. Q2 itself delivered SEK 664 million, almost tripled compared to 2019, which is very strong. The macroeconomic uncertainty in the beginning of this year held actually back investments, and we had a cautious approach with low CapEx in the first half year. With the market development during the spring and early summer months and our strong financial position, we plan for higher CapEx later this year. Working capital was negatively impacted by the previously communicated repayment of variable rent debts for 2022 of about SEK 700 million. Excluding the effect of repaid rent debts, the development of working capital was positive, driven by increased operating liabilities.
Please then turn to page 12. As Jens also mentioned, we have a strong financial position, and we continue to reduce our debt level. Net debt increased to SEK 2.8 billion in the quarter and corresponded to a net debt in relation to Adjusted EBITDA of 1.1 x on a rolling 12-month basis. This was lower than in the previous quarter, where the net debt in relation to Adjusted EBITDA amounted to 1.2 x and in line with the debt level at year-end of 2022. Net debt included SEK 1.6 billion related to the convertible bond and SEK 841 million related to deferred VAT payments and Social Security contributions in Sweden. Excluding the convertible bond, net debt in relation to Adjusted EBITDA amounted only to 0.5x .
Our available credit facility amounted to SEK 3.2 billion, total available liquidity amounted to SEK 2.7 billion at the end of the quarter. The convertible bond has its conversion price of SEK 43.36, as you know, matures in October 2024, with a potential dilution of 41.5 million shares. Please turn to page 13. Here you can see the financial net items and impact from IFRS 16. Including IFRS 16, the reported financial net was minus SEK 503 million. Excluded for IFRS 16, the financial net was minus SEK 72 million, non-cash convertible interest was minus SEK 42 million. Interest payments on bank loans decreased as a result of our lower debt level. Ultimately, cash financial items amounted to minus SEK 29 million. Phew! A lot of figures there.
With that said, please turn to page 14, and back to you, Jens, for some final comments and some outlook.
Thank you very much, Åsa. Let's move straight into page 15. Some concluding remarks, and also, some reflections on the outlook from my side. It is really pleasing to see how we as a company improve and that we have, with all these efforts we put in, you know, day to day, we create very strong results. Looking at the first six months this year compared with 2019, we actually increased the Adjusted EBITDA with over 220 million Swedish krona. The improved, we also improved the margin of 1.1 percentage points from 8.1 - 9.2. Really strong development when we compare these years.
This is really also something that confirms our ambition to build a stronger and more profitable Scandic after the pandemic. Some outlook, we expect a strong third quarter, driven by continued high levels of leisure travel during the summer, as well as business travel and meeting, gaining momentum in the latter part of the quarter. Based on the current booking situation, we expect occupancy to be on par with the same period last year, but continuing also at higher average prices per room. With good momentum, we look forward to an eventful summer, and I want to thank all the employees for their fantastic commitment in every day's work, and our owners and guests for their trust and belief in Scandic.
With that said, back to you, operator, for the Q&A.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Adela Dashian from Jefferies. Please go ahead.
Good morning, Jens and Lisa. Just a few questions from me. The first one relates to your outlook as we think beyond just the summer months, because I think we can all conclude from what's going on right now in the general environment, that the summer months will most likely be pretty solid, driven by the current rates and all of that. But if we look beyond that and into the fall, when you do become a bit more dependent on the business travelers, and also with the fact that the general sentiment out there is that things will weaken to some extent due to macroeconomic factors and so on. How are you positioned to tackle that kind of a scenario?
I do realize that it's still early days, but are you able to gauge anything in terms of demand post-summer based on current bookings?
First, thank you, Adela, for the question. First of all, I would like to address and point out that we see no decline from the corporate segment. The corporate segment has been extremely stable, and as I said, I think we are beyond the point of talking about pent-up demand. You can talk about what happens, and for me, it's a bit like the wolf is coming, the wolf is coming. We don't know whether it's coming or not, but I see that, you know, inflation is going down. I think interest rates globally has stabilized, and I think that businesses are doing overall very strong.
All in all, I don't see the same macroeconomic concerns especially related to our industry. There's a tendency, and has been for all the period, but despite the two years of pandemic, that our industry is very stable. I think we see that we expect it to be stable also during the autumn. It looks very stable when we look at the booking patterns, and we look at this every day. Every day, we look at the, you know, the in-booking trends versus same time last year. When we look at this, we can say that right now it looks to be in line with last year on occupancy.
Meaning that we actually sell a few more rooms because we have more rooms available, and at much higher prices. Right now, you might all talk about wolf is coming. We don't see it for our industry. Even if it is, let's say that potentially something was happening, like we saw, maybe after the financial downturn, Scandic is much better prepared for this after a pandemic. I can tell you, we are extremely fast in turning around, if need be, when it comes to manning, et cetera. We are way above, paying, you know, the guarantee rents, et cetera. All in all, I think Scandic is better positioned for anything that might happen.
If it drops a few percentage points, we will handle it. Right now, I need to outline, we don't see it.
Yeah, great. That's very good color. Appreciate that. In terms of your expectations for average room rates, if we see inflation, you know, stabilizing at this point or even going down, is the expectation also then obviously that the average room rate should also stop increasing from these very high levels?
Yeah, with a few percentage points, you're right. It could potentially happen. We have a good tendency of being able to handle inflation. You have seen when we talk about Q2, we talk about 8%-10% up versus last year, month-by-month. Then, when you compare with 2019, we are up, you know, up between 15% and 21%. I think July will be even a bit higher, and I think the autumn might stabilize somewhat, but stabilize versus still with increases versus last year. Whether then that is up 8, or whether it's up 6 or 10, yet to be seen versus last year.
We will be able to handle, the, let's say, inflationary levels, and that's the most important thing, so that we can keep stabilized, margins and earnings.
Got it. All right. If I could just compare Q3 this year versus last year, especially in the Norwegian operations, where you were, positively impacted by the refugee housing. What did that look like in Q3 last year? Should we expect a bigger deviation, like in this quarter, on the top line performance due to that?
I think we are we have very little limited, and also you might put something into it. All in all, we don't have a lot of this. We have a few still in Norwegian, in Norway, we still have a few rooms out for the government, for preparing for refugees coming in. It's on a very limited level, so not really something that has a huge impact. When that's said, I would say what we have done in Norway is a fantastic journey. If you look at the. Now you can actually compare the quarter.
Let's say compare the Q2 with Q2 in 2019. You have seen that in Norway, we have managed to turn around the business in a strong way, with much higher margins and results.
As I said, we foresee, about approximately SEK 20 million in Q3 related to the Norwegian, housing refugees.
It was SEK 76 million last year, just to be clear.
That was all in all one-offs. The main part was, of course, this one.
Yeah.
Got it. Well, thank you very much. I think that's all for me. Thank you.
Okay, thank you, Adele.
The next question comes from Jamie Rollo from Morgan Stanley. Please go ahead.
Morning. Thanks, everyone. 3 questions, please. First of all, just on the forward-looking commentary about occupancy being similar year-on-year in the third quarter, you're also saying meetings are rebounding, business will recover towards the end of or post the summer. I mean, are you expecting therefore slightly negative occupancy year-on-year in leisure, or something else, sort of in that, in that sort of wording that I've sort of misinterpreted? Secondly, on cost inflation, I know you're mostly hedged on energy, I think 90% this year. Next year, I think that comes down a bit to 70%. I mean, is there anything material on a year-on-year basis or on cost on energy? Similarly, if you give us an update on where we are on labor costs too.
The final one, just on the pipeline, I mean, it's almost obviously had a lot of openings in the last year or two, but it's on the low side, particularly given the opportunity for Scandic Go. Just wondering about when that's going to be rebuilt, and what we should think about for sort of medium-term room openings a year. Thank you.
Thank you, Jamie. I can maybe take the first and the third, and then also can put some flavor into the cost and energy and labor part. Now, when it comes to the first one, occupancy, we don't foresee a negative improvement from leisure. That's very important. When we say occupancy is in line with last year, it is actually selling more rooms because of these approximately 3% more rooms in the market versus last year. That growth is kind of spread out both between leisure and corporate. Both segments are have been very stable.
When we say stabilized corporate segment, in what we look at, it is stable, but it is a bit different market from market still, because even within corporate, we of course have a very high domestic and intra-Nordic demand, and we are still lacking some of the long-haul continental businesses. It is almost in line with what we see in the leisure segment. Local demand from corporate on domestic and intra-Nordic is very strong, and that is actually on higher level than pre-pandemic. I hope that answered that. For the second also, maybe some cost part.
When it comes to the energy prices, as we said before, we are hedged. We are close all volumes are hedged for 2023, for 2024, around 50%, and then a minor part for 2025. I think that is, we of course, have been helped a lot in the result by having this in place. When it comes to cost levels and wages, we have like 4.5%-5.5% increase in our markets from April. That is a little bit more than what we expected. However, we think it's positive that there were, you know, calm in the labor markets, and the agreements are for two years, and it gives us stability.
Of course, we need to compensate. We also have the minimum rental fees that are up with, like, 8%-10%, and other costs, of course, also increasing. We need to adapt by, you know, controlling our opening hours, our staffing, and offering. I think also we have a really powerful purchasing function. All in all, I think it's important that we keep track on this, and it will, of course, impact the prices.
Yeah. I think Jamie, to your question, which is good, and we have had that discussion, I think, even before, I think especially when it comes to labor, like Åsa was saying, I think it might turn in, let's say the result of the labor union negotiations is approximately, let's say, 1 percentage point higher than what we would have been expecting. That is not, now I'm not only talking about our industry, but all industries. It's very good because What happens with that is, of course, that it's very calm, and I think a lot of the team members in all kind of businesses.
are a bit more satisfied with that, and that is holding up, you know, the activity levels in general and the consumptions and private spend because of that. People are less worried with this, and I think that has a huge impact on people holding up, you know, their investments and spends in going to concerts and going to hotels and vacations, et cetera. I think that percentage point is, might be very worthwhile paying out. The last question is linked to the growth of Scandic and Scandic Go. You're definitely right that we definitely during the pandemic concentrated on, let's say we didn't sign up a lot of new hotels during pandemic, and nor did our competitors.
There's both a positive and negative to this. Of course, we have a lower pipeline now because we opened 10 hotels last year, and we opened 1 hotel in the beginning of this year. Actually we took 11 hotels from the pipeline and opened, and then after that, we have now signed 2 Scandic Gos. It will take us a few years to rebuild, let's say, a stronger pipeline, but we are definitely working on that. Then, happy to announce another signing after the recording of the second Scandic Go. As we mentioned, we are still working on several cases as we speak. How much we will grow with this?
We have said, when we announced it, that we want to grow, you know, with some, let's say, 1,000-1,500 rooms, on a yearly average, on Scandic Go, on top of adding Scandic. Of course, we probably, I wouldn't say put percentage to this, but if we made 10 signings, we would probably make a few more signings in Scandic Gos than we would do in general Scandic. That's kind of to do what we have told you for years out the year, that we want to use this also to build an even stronger margin in the future. It is part of securing that we are more resilient, lowering risk, and we grow in this fast-growing economy segment.
All in all, I think it's totally in line with what we have communicated before.
Thank you for that. Can I come back on the energy? Just that drop down to 5th, I think you said 50% next year. I thought it was 70 before, but there's 50% hedging next year versus fully hedged this year. Is that a material increase in the group's energy costs on a year-on-year basis? We obviously don't know what level it.
No.
Level hedged at.
No, it's part of the strategy, and since the prices have been high, then we haven't, it's been part of the strategy not to sign up at too high levels. It's just that.
nothing to worry about in terms of
No
Increased energy costs next year?
No.
No. Then, as you see, energy prices has gone down and stabilized on a stabilized level. All in all, I think we have a, we are, of course, focusing on this one. We are viewing on this one, and eventually we will be hedging again, but we are waiting a bit till price levels are correct.
Yeah.
Okay. Thank you very much.
Thank you very much.
The next question comes from Juillard, from Deutsche Bank. Please go ahead.
Good morning, thank you for taking my question. First one is about the midterm guidance you gave on the EBITDA level. Just wanted to be sure that you were reconfirming the guidance around 11%, if I'm right. Second question is about the change in working cap. H1 change on working cap was significantly down, but there was a reason. Could you give us some more color on a yearly basis? Third question is about CapEx. Last year was clearly impacted by the new openings.
Clearly, it's lower this year, but could you give us a midterm view on what you are expecting and what your discussions are or could be reflected in the CapEx level on a midterm view one more time? Thank you.
Thank you, Juilliard, thank you for your questions. Again, let me take the first one on. We, first of all, we don't guide on EBITDA as such. We, of course, have a financial target of 11% as a margin, it seems right now that we are beating that, you know, which is good. We are a few percentage points up versus 2019 when you compare Q2. When we also then, let's say, that we will continue with the same occupancy level as last year in Q3, with higher prices, we also expect to cover the inflationary cost increases, and therefore we should continue to beat that with some percentage points.
That has also been a high focus area for us. We haven't come out with any changed financial targets, and as I mentioned, we don't guide for it. We, right now, we are beating it. I can take the last CapEx one, and then also can take the second question. Related to CapEx, you're definitely right. We have concentrated, and I think you as analysts like that we do that. We have concentrated on after the pandemic, to rebuild our balance sheet, and now we have done that more than you can say, in a very, very speedy and fast way. We have a very low debt situation.
Excluding the convertible, it's 0.5% of the EBITDA. I wouldn't say we have no debt, but we are getting close to having no, almost no debt, which means that we have a lot of cash available. We have a huge open credit facility we can benefit from if needed be. We expect to continue to earn quite a lot of money. We are now starting to again, with this confident in the believing, we will come back to a normalized level of 3%-4% on the CapEx year-on-year when it comes to renovation CapEx of the current portfolio.
We are, we have done very little during the first half, and we now speed up in the second half, and especially during, let's say, Q4 and Q1 next year. That's normalized our normal way that we do that in the wintertime with low occupancy. We will, the aim is definitely to come back to 3%-4% of the earnings into to CapEx.
Then some comment, comments to the cash flow. Of course, we look forward to have a more normalized cash flow and working capital position compared to pre-pandemic. Now, once we have repaid all the variable rent debts that we communicated before, that was like SEK 700 million. That is something that we won't see going forward in a stable market, because then we pay upfront as good as we can. Then we also have, compared to last year, of course, the short-term liabilities related to staff increased since we employed during the first half year last year. I would say that we expect going forward to have like a more pre-pandemic looking working capital situation.
Okay, thank you.
I can add a comment before we go to next questions, if there are. That I think I would like to also thank you, analysts, for being, you know, extremely into the details of understanding this, let's say, differences between the years. Of course, it was an extreme odd time of the year last year when we bounced and were employing, you know, 8,000 people in a quarter and also had a lot of deferred payments coming in and a lot of contributions coming in, retroactive from the year before, understanding on this.
I'm very positive that you also compare us still with 19, and understand that, of course, it's not like for like numbers, anything, but we are really developing strong as a company, with lower debt and higher earnings, and higher both top line and margins. That is the most important thing for me, that we, as a company, is a stronger and better company today than we were pre-pandemic. Back to operator for more questions.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Thank you very much, operator, and thank you all for dialing in. I know it's a busy day for you as well, but we wish you all a fantastic summer, and looking forward to speak to you. If you have any further questions popping in, you can just, you know where to contact us, so please do. Otherwise, have a great summer, and look forward to speak to you all again after.
Thank you so much.