MELIÁ HOTELS INTERNATIONAL S YEAR-END 2011 RESULTS February 29, 2012 Good day, ladies and gentlemen. Thank you for standing by, and welcome to the Meliá Hotels International Year-End Results conference call. During today s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. If you have a question, please press the star, followed by the one, on your touch-tone phone. If you would like to withdraw your question, press the star, followed by the two, and if you are using speaker equipment, please lift the handset before making your selection. I would now like to turn the conference over to Mr. Gabriel Escarrer, Chief Executive Officer. Please go ahead. Gabriel Escarrer: Thanks Operator. Good evening everybody. We are releasing these 2011 Results which verify that the positive underlying trend in the hotel business witnessed during the year has continued in the fourth quarter. We ll elaborate on that later on throughout this conference call, and apart from giving you an overview of 2011 results, we ll also give you an update on the trading environment and what you should expect going forward as far as the business is concerned. In order to do so, we are here with André Gerondeau (Executive Vice President of Hotels), Onofre Servera (Executive Vice President Group Finance), Luis del Olmo (EVP Marketing and Asia Pacific) and Carlos Lopez (Vice President Investor Relations) For any specific details, breakdown or data you may require, the Investor Relations team will be available, as always, following this conference call. Going into the Year-End Results, Total Consolidated Revenues and EBITDA have gone up by 6.8 % and 4.4 % respectively while Net Profit stands at 40.1 million Euros versus the 50.1 million Euros of one year ago, a -19.9 % decrease. The results are influenced by the underlying evolution of the hotel business, which we understand has been positive throughout the year, and the net impact of some extraordinary items that occurred during the last quarter versus the capital gains generated within the framework of the asset rotation activity. Meliá Hotels International Page 1 2/29/2012
Looking at the hotel figures for the year: As we have been explaining throughout the quarterly reports, generally speaking the positive evolution of the resorts in the Caribbean and Spain along with European cities is largely behind the RevPAR trend. o o o o RevPAR in Latin America has gone up by 7.7% on the back of the evolution of US consumption and Latin American feeder markets, especially Brazil in both the leisure and the meetings, incentives, congresses and events segments in our resorts in the Caribbean. The evolution of the Spanish resorts was especially strong in the Balearic and Canary Islands, which recorded strong occupancy rates, partially benefiting from the redirection of tourist flows given the instability in North Africa, leading to an 18.4% RevPAR increase while European cites, this is excluded Spain, posted a 5.6% increase on the back of the evolution of the German cities where the Company has 22 hotels as well as the evolution of the Melia White House in London and the 7 hotels in central Paris. The evolution of the business travel segment, especially in Germany along with the efforts made to change segmentation towards a more international / (slash) business traveller and e-commerce strategy, broadly explain the results. This good performance offset the more modest evolution Melia has witnessed on an aggregated level in Italy and the Spanish cities, where RevPAR has changed by +2.7% primarily due to a satisfactory performance of Madrid and Barcelona that compensates the sluggish performance of the secondary cities which trend has continued in the fourth quarter of the year. o All in all, RevPAR has gone up by + 9.0%. Continuing with the Hotel business evolution, Cost per Stay went up by 0.84% - below average inflation in the markets where the Company operates - which has led to an Ebitda increase of + 2.9% for the year. This reported evolution is influenced - as you may know - by changes in perimeter due to the 4 recent sale and lease deals and 7 hotel disposals. When taking into consideration these latest effects, Ebitda goes up by 12.5 % while margins improve by 92 basis points. Meliá Hotels International Page 2 2/29/2012
I would like to end this summary by pointing out a few things on our P&L account: The Company includes the impairment of one hotel by 6 million Euros being the only impact of the new asset valuation. This is included at the depreciation level. Net Interest Expense goes up to 63.8 million euros, an increase of 16 million Euros. In this regard, financial expenses represent 71.3 million Euros versus 66.9 million in 2010 (that s plus 6.6%) while financial revenues stand at 7.5 million versus 19.1 million in 2010, a 60.7% decrease. o The negative evolution of financial revenues is related to the fact that in 2010 the Company registered capital gains at the financial level reaching 17.2 million Euros. These capital gains were linked to the sale of a minority stake in a resort in Cancun o On the other hand, the increase of financial expenses is mainly related to the increase in spreads. Specifically in 2011, the Average Interest rate reached 4.5% while in 2010 it stood at 3.9%. Financially speaking, the first thing that we would like to mention is that Meliá has been able to meet its bank covenants - Net Debt to EBITDA and EBITDA to Net Interest, - that currently involves 464 million Euros. The Company also remains confident that it will accomplish its covenant goals in 2012 on the back of the evolution of the business and the asset rotation activity. The net debt figure has shown a 15% reduction in the fourth quarter going down to 1,002.7 million on the back of asset sales carried out during the latter part of the year. Year on year, net debt has increased by 5.8%, this is 55.2 million Euros being, the main reason the cash outflow of the finalisation of the 2 owned Paradisus resorts in Mexico. Nevertheless, throughout 2011, the Company managed to keep its average interest rate at 4.5% partly due to the 66% fixed rate component of our total debt. Meliá enjoys the support of financial institutions as a reliable and financially sensible company, as widely demonstrated in day to day operations. The Company renewed credit facilities throughout the year, enjoys a comfortable liquidity situation, and will continue refinancing the sections of major debt maturities way in advance, taking advantage of any opportunities that might arise in the market. Meliá Hotels International Page 3 2/29/2012
The outlook: Going into the future, the overview continues to reflect a duality of the situation inside and outside Spain, with the business broadly evolving at two different speeds. This has consequences in the development of the Strategic Plan 2012-2014 given that we forecast a scenario of growth and maximization of profit and margins in the international arena, while in Spain more rigorous cost control will be applied in headquarters, hotels and the vacation club business, just like we did back in 2009. The business outside Spain is where the Company expects to take full advantage of the strategic initiatives undertaken to maximize growth and margins. 1) One of the most important initiatives is the implementation of a Revenue Management Culture that implies: a. Focusing the whole organization on a structure more clearly focused on revenues together with a efficient cost management b. Maximization of RevPAR through Average Room Rate to lever profitability and c. Reinforce higher-growth segments and feeder markets 2) Another initiative is to develop our customer loyalty based on customer knowledge, added value proposals in melia.com and the delivery of ever higher levels of satisfaction. This dual vision revenue / customer has generated important achievements like for example:2.5 million regular customers on the Mas rewards loyalty programme, 22% of roomnights generated by these customers, a significant increase of revenues in 2011 from emerging feeder markets ( for instance Brazil: +43%, China: +31%, Eastern Europe: +13%) that offset the negative evolution of Spanish guests ( which reported a minus 5.1%) also, 7 consecutive quarters of RevPAR growth as well as improvement in the RevPAR Penetration Index 2011 over competitors in key cities such as Madrid, London, Berlin, Paris and Milan, an 80.7% score in quality questionnaires, and sales in centralized channels of 165 million euros. Meliá Hotels International Page 4 2/29/2012
This focus on the business will be stressed over the next three years and we expect to take full advantage of the investment made in search engine optimisation and the e-commerce strategy, new sales teams and agreements with distribution partners in the premium segment, along with an increasing presence in alternative feeder markets such as Brazil, Russia, Eastern European countries and China. We understand that the Strategic Focus at the international level combined with the Contingency Plan in Spain, will allow us to increase our RevPAR by a mid-single digit in 2012 and this will be largely explained by Average Room Rate rather than by volume. This is already the case in the first quarter, where thanks to the evolution of resorts in Latin America and the Canary Islands, together with the main European Gateway cities, the Company forecasts a RevPAR increase of around 5%. This is even the case taking into consideration the sluggish performance of the Spanish secondary cities. Just a final note on 2012, In order to make a proper analysis of P&L figure we should take into consideration de net effect of the loss of profit out of the sale and lease deals or asset disposals made in 2011 ( loss of Ebitda, 16 million Euros) versus the Ebitda incorporated due to the new additions, primarily the two Paradisus in Playa del Carmen and other management contracts (some 14.5 million Euros of additional Ebitda in 2012). In terms of the strategy and development, at this stage we consider, Meliá Hotels International has reached an extraordinary level of maturity with regard to the added values offered to hotel properties as a manager in the field of: Global sales leadership, Loyalty programmes, Hospitality IT systems, and Brand standardisation For this reason, the roll out of our business model in the future will be primarily through low capital intensive formulas or joint ventures when capital may be required. Year to date, the Company has been signing 1 hotel every 3 weeks leading to a current pipeline of 31 hotels and close to 9.000 rooms, all of them either under management or, to a lesser extent, variable lease contracts. The vast majority (84%) are included in our Upscale or Premium brands while 87% of the rooms are outside Spain, enabling also to further increase Melia s network in new countries such as Austria, Costa Rica or the United Arab Emirates. All in all, the Company has presence in 35 countries and will continue with the goal of internationalization that began more than 20 years ago. Meliá Hotels International Page 5 2/29/2012
That is pretty much it. We hope we ve been able to explain the situation to you to your satisfaction. Now we are happy to respond to any questions you may have. We remind you that we are here with André Gerondeau, Executive Vice President of Hotels; Luis del Olmo, Executive Vice President of Marketing and Asia; Onofre Servera, Executive Vice President Group Finance, and Carlos Lopez, Vice President, Investor Relations. Thank you. Operator, please? Thank you. We will now begin the question and answer session. As a reminder, if you have a question, please press the star, followed by the one, on your touch-tone phone. If you would like to withdraw your question, press the star, followed by the two; and if you are using speaker equipment, please lift the handset before making your selection. And our first question comes from the line of Javier Echanove with Santander. Please go ahead. Javier Echanove: Carlos López: Yes, hello. I had a couple of questions. First one is in relation to the preferred shares that you have, and what is your intention with those preferred shares, whether you are going to amortize them or not; and in case you plan to amortize them, and in relation to the overall debt situation, what are your plans in terms of asset sales for this year? How much do you think you will need to realize in order to meet covenants? That s one thing. And the other thing is if you could give us some guidance as to what is the margin improvement or margin evolution in the hotel EBITDA margin evolution in the hotel business that you expect for 2012? Thank you. Thank you, Javier. As far as the preferred shares are concerned, we re talking about 107 million that mature in April 2012. It is our intention to amortize the preferred shares, and in this regard, although the Company has liquidity, it s exploring at the moment the different possibilities in order to refinance that. Basically, the options are pretty much in line with the issue with an issue in the capital markets that excludes any equitylinked deal. This is our intention at the moment, and we hope to keep you posted on that. Regarding the asset sales, the budget that the Company has at the moment is slightly above the 100 million for this 2012, and on this basis, the Company would be meeting its financial ratios. As far as the EBITDA evolution EBITDA margin evolution throughout 2012, basically taking into consideration the evolution of the different markets, primarily in Latin America and the Caribbean, which is high season at the moment, together with the evolution of the Canary Islands along with the evolution of what we re seeing in the major European Meliá Hotels International Page 6 2/29/2012
cities, and taking into consideration that it s still early days to talk about what is going to happen in the third quarter of the year, which represents some 40% of the consolidated EBITDA, we do understand that there s going to be a margin improvement. So basically, what we expect as far as EBITDA margin is concerned throughout 2012 is between 80 to 90 basis points improvement. Javier Echanove: Carlos López: Bosco Ojeda: Thank you. Thank you. Thank you, and our next question comes from the line of Bosco Ojeda with UBS. Please go ahead. Hi, good afternoon. If I may, a bit of a follow-up on the previous question, what sort of occupancy and prices have you seen year-to-date, and what is if you could give us a bit of color on how occupancy and prices are going, or your expectations for this year. Do you still think that Spain, for instance, can still be positive? A little bit of color on that front. And I also wanted to ask you, in terms of your long-term financial leverage, what is a level that you would feel comfortable? Is there a level that should be your target for the long term? Thank you. Andre Gerondeau: Thank you. If I may, I ll address the evolution of the business for this first quarter of the year, and I think we can explain that of the increase on if you follow the numbers that we ve had in the past, we would say that we have increased ADR by over 100% this year, meaning that from our around 5% REVPAR increase for Q1, there s about a 7% increase on ADR and a slight drop in occupancy. There are three main regions behind or three main strategies behind this. One is that on the Canary Islands for the winter and same for the rest of the summer, we ve been able, on the back of the Arab Spring from last year, to control the pricing strategy and minimize any offers that we had already launched last year, so this is really supporting the REVPAR growth and the ADR growth on the Canary Islands. Secondly, we ve been able to maximize by a different by reporting segmentation on the Caribbean resorts, mainly on the Paradisus resorts as well as the opening of the new Paradisus Playa Carmen, and we also see a consolidation of both our Cancun properties, specifically with the conversion of the ME Cancun hotel and the launching of the Grand Meliá Cancun all-inclusive concept. And thirdly, that all of our main European hotels, European cities such as Paris, London, and some of the German cities, have growth in price. So, this is the scenario on the ADR. We will also see based on the cost structure that we ve launched, our contingency plan in Spain, this contingency plan reinforces a strategy that we launched in 2009, so we ll Meliá Hotels International Page 7 2/29/2012
clearly see that we will try to cap most of the expenses in Spain and overhead in headquarters as well. I don t know if this responds to your first question. Bosco Ojeda: Thank you Regarding your second question about the net debt in the medium term, we will aim I mean, our aim that in three years time, by the end of 2014, we should have around 750 million of net debt. This is what we expect. Bosco Ojeda: Fifteen, or 50? Seven hundred fifty, 7-5-0. Bosco Ojeda: Patrick Hughes: Thank you. Thank you. And our next question comes from the line of Patrick Hughes with Citigroup. Please go ahead. Yes, good evening to you. Just a couple of questions on your covenants and your net debt constituents. First of all, can you give us the covenant levels and what they were at the end of 2011? That s the first question. The next question is could you please clarify exactly what is included in net debt for covenant purposes, because your balance sheet in the release shows a much higher number than you state. Thirdly, with EBITDA, can you tell me what adjustments you make to the published figure for covenant purposes? I believe you add back book profits on any hotels sold. Please correct me if I m wrong there. And finally, you talked about refinancing bank facilities throughout the year. Can you just give us some detail as to what how much they were, and the term that you managed to get on terming them out? Thank you. Thank you. Once again ladies and gentlemen, if there are any additional questions, please press the star (cross talking). Yes, regarding your question, the covenant we have is related to just net debt to EBITDA, which it has to be below 3.5, and EBITDA to adjusted net interest expense over 4.5. These figures have been the closure to 11 3.2, 3.20 compares with 3.5, 3.5; and 4.52, which compares with the minimum of 4.5. Regarding the adjustments to be made in calculation of the ratio, we have to take into consideration that these covenants are related with three syndicated loans, the first of which was signed back in 2004; and since then, it s been pretty much a rollover of the original contract. In 2004, the Meliá Hotels International Page 8 2/29/2012
Spanish GAAPs apply, so basically what we do is to make some adjustments in order to reproduce the former Spanish GAAPs. As far as the net debt is concerned, we take into account two major adjustments: one is 107 million related with the preferred shares that is not included in the adjusted net figure; second adjustment is the is we decreased the net debt figure by the treasury stock, which at the closure of 2011 represented 108 million. The EBITDA we make no adjustment at the EBITDA level that s pretty much the reported one while at the financial expenses, the only the net financial expenses, the only thing that is not included is, one, the foreign exchange; two, the long-term leases which are included within financials within IFRS; plus the approximately 8 million related with the preferred dividends. These are the adjustments made. Now, answering your question regarding the evolution of total credit facilities, that represents a total amount by the end of 2011; it s about 280 million that s the total figure. And throughout 2011, we ve seen that, on average, these trade policies have increased its cost by an average of 90 basis points. Going into the future, we expect some increase in the average cost of debt, but generally speaking, we d be pretty much in the 5% scenario by 2012, taking into consideration the fixed debt, which represents two thirds of our total debt and the floating. Patrick Hughes: Patrick Hughes: Sorry, you re saying that the 280 million is the sum that you termed out through 2011? The figures that we have actually withdrawn out of the total (inaudible) represent approximately 230 million. This is the average yearly figure that we withdraw throughout the year. Does that answer your question? I ll come back to you. I m afraid none of this makes sense a lot of sense to me. I ll have to come back to you offline, I think, so you can talk me through it, if that s okay. Thank you. Thank you. And our next question comes from the line of Helen Rodriguez with BNP Paribas. Please go ahead. Hi, yes. The line s a bit bad, so I wonder if you can repeat. You target 750 million of net debt by when? Gabriel Escarrer: 2014, by the end of 2014. Okay. And then, just now you ran through a couple of the adjustments to financial expenses, and I missed the first one. Well, within the financial expenses, in order to make the calculation of the covenants, what is not included is the preferred shares the preferred Meliá Hotels International Page 9 2/29/2012
dividend by 8 million. It s not included. If we look at our P&L account, the other interest expense, which is the long-term leases, and within the financial expenses are not included 8 million of oh yes, the aforementioned preferred expenses. No, and the other one that is not included is the exchange rate differences. Carlos Lópz: Okay, great. Thanks. And then I had a couple of other questions. In terms of sorry to bring you back to your debt again, but you ve got essentially the pref this year, and then you ve got your convert, which is out in 2014, the 200 million. Correct me if I m wrong, but most of your bank facilities seem to mature inside the 200 million. Is there reluctance on the part of the banks to extend credit beyond that 200 million, or is that just coincidence? Or am I wrong? No, there is no reluctance in refinance beyond this 200 million. We have a pretty good relationship with them, and we are refinancing our debt as normal. We haven t had any problem so far, and I mean, we ve seen also a couple of examples the first at least one in the first quarter of the year. Okay. And can you just talk us through who you know, that you ve got these three syndicated loans. Is that mostly Spanish banks or international banks? It s primarily the Spanish banks primarily Spanish banks. Yes, I would say that the majority, more than 60% of the syndicated I m talking from top of my head is related with the financial institutions, and most of them is related with the seven banks included within the (inaudible) index. Okay. And sorry, on your covenants, am I right your covenant is 4.5 and you achieved 4.52, so you just basically passed it, though just. Is that right? André Gerondeau: Regarding the no, it s it s 4.52. Yes. At the moment, it s 4.5, so we just passed it. You re right. You passed it by just 0.02. Carlos López: Exactly. So, given that level of, you know, just I mean obviously there s virtually no headroom, does that covenant step down? Do the covenants step down during next year, or they stay at this level? No, they stay at this level. There s no step down whatsoever. Meliá Hotels International Page 10 2/29/2012
Okay, great. And you say that you expect to pass them. Have the banks made any comment on the fact that you were so tight on the covenants, or they ve not said anything? We haven t received any significant comment. We haven t received any comment from the banks regarding the situation of the covenants, no. Okay, great. And then finally, just you know, I should probably know this but I haven t had time to read the report properly yet, but you had 129 million capital gains. Is that right? Regarding yes, that s correct. Okay. And so if I take out the capital gains from 11 and 10, do you have the clean EBITDA numbers for just the operations rather than the asset sales? Well, yes, on Page 15 of our report, you have the segmentation. Okay, all right. Okay, sorry, yes. I just got the release a second before the call, so I haven t had time to look at it properly. Okay, thanks very much. Thank you. Thank you. Once again, ladies and gentlemen, if there are any additional questions, please press the star, followed by the one at this time. As a reminder, if you are using speaker equipment, you will need to lift the handset before making your selection. And we have a question from the line of Maria Munoz with Banesto Bolsa. Please go ahead. Maria Muñoz: Maria Muñoz: Hi, good afternoon. Hi, Maria. Can you hear me? Yes? I would like to know if you have any news coming from the stake that the Sabadell has in the Company, if they are willing to sell it to some other bank, or if you have any news about that? And my second question would be if you have the real estate valuation of your assets, like an update on that; and in case you don t have it yet, when do you expect to have that valuation? Sorry if you have already said that at the beginning of the conference call, but I couldn t get in. No, Maria, regarding the new valuation of assets, it s going to be published by mid-march, most likely on the 15 th. Again, we do not expect Meliá Hotels International Page 11 2/29/2012
surprises about the evolution of the valuation of the assets, taking into consideration the realistic value of the same. Going into your first question regarding participation of the Sabadell, Banco Sabadell does not actually take over Banco CAM up until mid- March or the end of March, so we actually have no one to speak at virtually in Banco Sabadell, and we haven t had any feedback, any information about what their intentions are regarding the minority the minority stake. Nevertheless, we understand their interest in, if not all of it, having a significant portion of the 6% of about 11 million shares, and we are not up until which extent will effect the share price, the allocation of this 6%, but what we re pretty sure of is that they are interested and they are significant investors that would be willing to take this 6%, or at least a significant part. So but actually, we don t know anything about the stake and any feedback from Banco Sabadell. Maria Muñoz: Okay, thank you. Pierre Causse: Thank you. And the next question comes from the line of Pierre Causse with BNP Paribas. Please go ahead. Yes, good afternoon. I ve got three quick questions. The first one is just could you recall why, despite such an impressive growth in REVPAR, we have such a modest increase in EBITDA margin? This is the first question. The second question is could you remind us of the sensitivity of EBITDA on net profit to a 1% change in REVPAR? And the last question would be if you refinance the preferred shares, then how will that influence the computation of your covenant? Thank you. Thank you. Regarding the evolution of REVPAR and EBITDA, we should take into consideration that there have been no changes in perimeter in the company, most likely taking into consideration for sales and leasebacks that we ve done throughout the last month, together with some additional asset disposal. The EBITDA the reported EBITDA increase represents 2.9%, and as we mentioned, it is influenced by perimeter when taking into consideration the like for like effect, EBITDA of hotels goes up by 12.5%, while margin improves by 92 basis points. Regarding the sensitivity of REVPAR and EBITDA, that depends on the whether this REVPAR evolution is explained by occupancy or ADR. When REVPAR is explained 100% by occupancy, a 1% increase in EBITDA sorry, a 1% increase in REVPAR represents a 1.5% increase in EBITDA. When it s 100% explained by average room rate, it represents 2.2%. So the sensitivity of our EBITDA is higher obviously towards average room rate rather than volume. Regarding the evolution of the replenishing of the preferred shares, at the moment they re not taken into consideration within the calculation of the Meliá Hotels International Page 12 2/29/2012
net debt to EBITDA ratio. If we refinance, let s say, with a bond in the capital market, obviously this would take into this would be part of the equation in the calculation of the ratios. Pierre Causse: Joao Safara: Joao Safara: Gabriel Escarrer: Okay, thank you. Thank you. Thank you. And our next question comes from the line of Joao Safara with BPI. Please go ahead. Yes, hi. Good evening. Joao Safara from BPI. Very quick question. From my understanding, the outcome of the asset valuation on your accounts in 2011 is roughly 6 million impairment (inaudible) in one hotel. I was wondering if you could share with us the book value of your own hotels in 2011. The book value of our hotels represents roughly 1.8 billion. This is roughly the valuation of our hotels on the books. This is relatively low towards the market value of our assets, taking into consideration that back in 2005 when we made the migration towards IFRS, we didn t revalue our assets in the balance sheet, and effectively, as you said, the impact on this new valuation on the impairment of the Company is limited to the 6 million that you can find at the depreciation line in the P&L account. Okay, thank you very much. Thank you. Maybe one last question, Operator? Okay. I m showing no further questions Okay. At this time. Please continue. Okay, so thank you very much for your attention and your time. We hope that we ve been helpful here. Please do not hesitate to contact our Investor Relations department for any further questions you may have. Thank you very much. Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation. You may now disconnect. END Meliá Hotels International Page 13 2/29/2012