Scandic Hotels Group AB (publ)

Thank you very much and good morning everyone. And 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 Mathisen and I'm the CEO of Scandic. And like was said, together with me, I have Ose Viren, 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 14th, 1963, opened our first ESSO motor hotel in Laxå in Sweden. So we have actually gone from one hotel, you could say one roadside hotel, to 269 hotels in operation in six 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 two, 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. So demand was on high levels from both leisure and corporate in all our markets, and we actually reported an all-time high REF PAR 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, and 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, ScandiGo. So ultimately, this enables a faster growth and even improved margins. The establishment of ScandiGo, our newly launched brand in the fast-growing economy segment, is underway, and we are keeping a high pace in all our margins 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. Lastly, we have entered a very busy summer period, and we expect a strong third quarter with high demand and increasing prices. So all in all, this was a strong quarter, and 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 772 million Swedish kronor, compared with 1,083,000,000 SEK 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. And 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 2019. Altogether, we report a strong result driven by a solid market development in combination with high efficiency. Also, I will, 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 five quarters with good demand in a row. Domestic travel and travel between the Nordic countries are at continuing 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 five. 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 to 21 percent above 2019 levels in the second quarter and 8 to 10 percent 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 REF part development also indexed to corresponding month 2019. The REFPA development was strong in the quarter, with Norway continuing to be the strongest market at levels 20 to 30% above 2019 levels. Scandic reached a new record level with REFPA of 828 Swedish kronor in the quarter, which is compared with 749 Swedish kronor in 2022 and 745 in 2019. On average, we have just over 3% more rooms in the quarter compared to the second quarter in 2022. Please turn to page seven. Last quarter, we announced, I would say finally, re-announced, you can say, Scandi 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 Scan2Go, 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 Swarm 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 Scandico continues, we have great interest from partners, landlords, and property owners, and we look forward to bringing more Scandico 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, and 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, but 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, and I would like to pass it over to our CFO, Åsa Viren, 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 5.7 billion set compared to the second quarter of last year. We report a strong result with an adjusted EBITDA of 772 million SEK corresponding to a margin of 13.6% compared to 20.5% in the second quarter last year. But I want to highlight that Q2 last year included 261 million SEK 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 20 million SEK 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. And we will, of course, come back today to those initiatives later on 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 loss 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 20 million SEK. This is related to housing for refugees in Norway. And I also want to remind you that we had one-offs in the third quarter last year of 76 million SEK. Then please turn to page 11. Free cash flow improved slightly to 306 million SEC, driven by higher turnover, improved results, and lower capex compared to the first half of last year. Q2 itself delivered 664 million SEC, 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 700 million SEK, and excluding the effect of repaid rent debts, the development of working capital was positive, driven by increased operating liabilities. So please then turn to page 12. And as Jens also mentioned, we have a strong financial position, and we continue to reduce our debt level. Net debt increased to 2.8 billion second quarter and corresponded to a net debt in relation to adjusted EBITDA of 1.1 times 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 times and in line with the debt level at year end of 2022. Net debt included 1.6 billion related to the convertible bond and 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 all to 0.5 times. Our available credit facility amounted to 3.2 billion SEK and total available liquidity amounted to 2.7 billion SEK at the end of the quarter. Lastly, the convertible bond has its conversion price of 43.36 Swedish krona and, as you know, matures in October 2024 with a potential dilution of 41.5 million shares. And lastly, 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 503 million SEK. Excluded for IFRS 16, the financial net was minus 72 million SEK. And non-cash convertible interest was minus 42 million. Interest payments on bank loans decreased as a result of our lower debt level. Ultimately, cash financial items amounted to minus 29 million SEK. 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 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 kronor, and we also improved the margin of 1.1 percentage points from 8.1 to 9.2. So a 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. Then 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. So 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. So with good momentum, we look forward to an eventful summer, and I want to thank all employees for their fantastic commitment in every day's work, and our owners and guests for their trust and belief in Scandi. With that said, back to you, operator, for the Q&A.

If you wish to ask a question, please dial star 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star 5 again on your telephone keypad. The next question comes from Adela Dashian from Jefferies. Please go ahead. The next question comes from Adela Dashian from Jefferies. Please go ahead.

Good morning, Jens and Åsa. 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 currency 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. But 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. Then 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 inflation is going down. I think interest rates globally has stabilised. And I think that businesses are doing overall very strong. So all in all, I don't see the same macroeconomic concerns, especially related to our industry, because there's a tendency and has been for all the period, despite the two years of pandemic, that our industry is very, very stable. So 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 in-booking trends versus same time last year. And 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. So right now, you might all talk about Wolf is coming. We don't see it for our industry. And even if it is, let's say that potentially something was happening like we saw maybe after the financial downturn, Scandi 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, etc. But we are way above paying the guarantee rents, etc. So 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. But 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 stabilizing at this point or even going down, Is the expectation also then obviously that the average room rate should also stop increasing from this very high level?

Yeah, with a few percentage points, you're right. It could potentially happen. We have a good tendency of being able to handle inflation. And you have seen when we talk about Q2, we talk about 8% to 10% up versus last year, month by month. And when you compare with 2019, we are up between 15% and 21%. I think July will be even a bit higher, and I think the autumn might stabilize somewhat, but stabilize still with increases versus last year. whether then that is up eight or whether it's up six or 10 yet to be seen versus last year. But 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. And then if I could just compare Q3 this year versus last year, and especially in the Norwegian operations where you were and positively impacted by the refugee housing. What did that look like in Q3 last year? And should we expect a bigger deviation like in this quarter on the top line performance?

I think we have very, very little limited. And also you might put something into it. But all in all, we don't have a lot of this. We have a few still in Norway. We still have a few rooms out for the government for preparing for refugees coming in. But 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. And if you look at the – now you can actually compare the quarter. Let's say compare the Q2 with Q2 in 2019, and you have seen that in Norway we have managed to turn around the business in a strong, strong way with much, much higher margins and results. Yeah.

And as I said, we foresee about approximately 20 million SEC in Q3 related to the Norwegian housing refugees.

And it was 76 million last year, just to be clear.

That was all in all one-offs, but 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. Three 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 rates year-on-year in leisure or something else sort of 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 editing material on a year-on-year basis on cost, on energy? And similarly, if you can give us an update on where we are on labour costs too. And the final one's just on the pipeline. I mean, it's obviously had a lot of openings in the last year or two, but it's on the sort of on the low side, particularly given the opportunity for Scandic Go. So 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. And 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 last year. So that's very important. And 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. And that growth is kind of spread out both between leisure and corporate. So both segments 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 very high domestic and inter-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 lesser segment. So local demand from corporate on domestic and inter-Nordic is very strong, and that is actually on a higher level than pre-pandemic. So I hope that answers that. For the second also, maybe some cost part.

When it comes to the energy prices, as we said before, we are hedged. Close all volumes are hedged for 2023. For 2024, around 50%, and then a minor part for 2025. But I think that is... We, of course, have been helped a lot in the results by having this in place. And when it comes to cost levels and wages, we have like four and a half to five and a half percent 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 agreements are for two years and it gives us stability but of course we need to compensate. We also have the minimum rental fees that are up with like eight to ten percent and other costs of course also increasing but we need to adapt by you know controlling our opening hours, our staffing and offering and I think also we have a really really powerful purchasing function. So all in all, I think it's important that we keep track on this, and it will, of course, impact the prices.

Yeah. And 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 Osa was saying, I think it might turn in, let's say, the result of the labor union negotiations is approximately, let's say, one percentage point higher than what we would have been expecting and that is not not not only talking about our industry but all industries but 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 so people are less worried with this and I think that has a huge impact on people holding up their investments and spends in going to concerts and going to hotels and vacations etc. So I think that percentage point 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 on, let's say, we didn't sign up a lot of new hotels during pandemic and nor did our competitors. So 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 one hotel in the beginning of this year. So actually, we took 11 hotels from the pipeline and opened. And after that, we have now signed to ScandiGo's. So it will take us a few years to rebuild, let's say, a stronger pipeline, but we are definitely working on that and happy to announce another signing after the reporting of the second ScandiGo. And 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 with some let's say, 1,000 to 1,500 rooms on a yearly average on ScandiGo on top of adding Scandi. 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 ScandiGo than we would do in general Scandi. And that's kind of to... to do what we have told you for years after year, that we want to use this also to build an even stronger market in the future. So it is part of securing that we are more resilient, lowering risk, and we grow in this fast-growing economy segment. So 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, I think you said 50% next year. I thought it was 70% before, but... this 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 will be 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.

Okay, thank you. So nothing to worry about in terms of the increase in energy costs next year?

No. And as you see, energy prices have gone down and stabilized on a stabilized level. So all in all, I think 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 until price levels are correct.

OK. Thank you very much. Thank you very much.

The next question comes from Julid from Deutsche Bank. Please go ahead.

Good morning. Thank you for taking my question. First one is about the mid-term guidance you gave on the EBDA 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. So H1 change in working cap was significantly down, but there was a reason. But could you give us some more color on a yearly basis? And 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 mid-term view on what you are expecting and what your discussions are or could be reflected in the GAPEX level on a mid-term view one more time. Thank you.

Thank you, Julie, and thank you for your questions. Again, let me take the first one. First of all, we don't guide on EBITDA as such. We, of course, have a financial target of 11% as a margin. And it seems right now that we are beating that, you know, which is good. We are a few percentage points up versus 19 when you compare Q2. And when we also then, let's say, 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 we should continue to beat that with some percentage points. And that has also been a high focus area for us. So we haven't come out with any changed financial targets. And as I mentioned, we don't guide for it. But right now we are beating it. I can take the last CapEx one and then also can take the second question. Related to cabbage, you're definitely right. We have concentrated, and I think you as analysts like that we do that. We have concentrated 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. So I wouldn't say we have no debt, but we are getting close to having 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. And we expect to continue to earn quite a lot of money. So we are now starting to, again, with this confidence in the believing, we will come back to a normalized level of 3% to 4% on cash. on the capex year on year when it comes to renovation and capex of the current portfolio. So 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 or normal that we do that in the winter time with low occupancy. So we will, the aim is definitely to come back to three to 4% of the earnings into capex.

Then some comments to the cash flow. And 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 that we communicated before, that was like 700 million. So that is something that we won't see going forward in a stable market because then we pay upfront as good as we can. And 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. So I would say that we expect going forward to have like a more pre-pandemic looking working capital situation.

Okay, thank you. And I can add a comment before we go to next questions, if there are. I think I would like to also thank you, Analyst, for being extremely helpful into the details of understanding the differences between the years because of course it was an extreme time of the year last year when we bounced and were employing 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 all 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. And 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. So 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. And 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 know where to contact us. So please do. Otherwise, have a great, great summer and look forward to speak to you all again after.

Thank you so much.