Q3 2019 Earnings Call
Greetings and welcome to the oral H.C. third quarter 2019 earnings results Conference call.
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It brings question answer session will follow the formal presentation.
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It is now my pleasure to introduce your host Mr. nature. Thank you Sir you may begin.
[noise]. Thank you welcome to always Corporation third quarter earnings call with US today, Our board Chairman of the board Jake brace for copper and Julie Shiflett, SVP and Chief Financial Officer.
Before we get started I want to remind you that the company's remarks today contain forward looking information there are subject to a number of risk factors that may cause actual results to differ materially.
I was expressed or implied.
For discussion of important risk factors. Please see our most recent Form 10-K subsequent reports filed with the FCC.
Oh Form 10-K , and other filings are available on our website or L.A.H.C.O. dot com.
The Investor Relations section or through the FCC website.
DC Dot Gov.
These forward looking statements speak as of today, and we undertake no obligation to publicly update them to reflect subsequent events or circumstances.
The company will also be referring to a number of non-GAAP measures.
A reconciliation of these measures to their comparable GAAP measure is provided in the tables of our press release.
That release is also available on the Investor Relations section of our website.
I'll now turn the call over to Bob.
Good morning, Thank you for joining our call today I'm, Bob <unk> Chairman of L. Correlates Corporation.
Joining Jewish that's what the company's Chief Financial Officer Officer. This morning to review the company's third quarter results.
Briefly discuss management changes it arledge.
Yesterday, the board accepted Greg mounts resignation.
We'll also be stepping off the board. These changes are effective immediately.
Acknowledging sharing our shareholders frustration regarding the lack of progress growing the core franchise business, along with elevated franchise terminations and weak performance of owned hotels.
The board understands the need for action to be taken.
That starts with the change in the company's leadership.
First step was making changes to the board of the last six months.
And now it is acted decisively and thoughtfully, what's the changes announced today.
Furthermore, the board has appointed a search committee with Jake brace, an independent director of the company's board as the Committee chair.
For the Board has also task Mr. Bryce be its weighs on between the board and management regarding day to day matters.
Until the company appoints <unk> Chief Executive Officer.
Management Committee will oversee the operations the company and will report to the board for Jacobs liaison.
Members of the Magic commit include Gary Sims, Chief operating Officer, Julie Shiflett, cheap Cineastes financial Officer, and Thomas the care in General Counsel.
Members of the Magic Committee and the board are laser focused on delivering superior value one service to our franchisees stem the pace of terminations restructuring franchise sales efforts to accelerate franchise growth.
And rightsizing the cost structure the business to reflect our religious current size reflect revenue and profitability requirements.
The asset sales in the past few years are largely complete.
The company now needs to put all its effort and the building around the strong business proposition for its franchisees and delivering value to shareholders. The change we've begun will take time to implement we greatly appreciate your support as we turn oral H into a fast growing hotel franchise company and identify a CEO that can affect.
Wait strategic and tactical moves needed to drive our growth.
I will now turn the call over to Julie who will walk through the company's third quarter results and revise 2019 outlook.
Thanks, Bob.
That's corporation reported a net loss for the third quarter of 2019 of $3.5 million or 14 cents per share as compared to net income of $8.9 million or 35 cents per diluted share in the prior year period.
The changes primarily due to prior year gains on the hotel sales that did not recur in the current here.
Softer current year performance of our hotel segment.
5.4 million dollar impairment charge, our owned hotel in Washington, DC and increase bad debt expense and collection costs, partially offset by higher franchise process every dakotans in selling general administrative and other expenses, primarily due to compensation reductions.
[noise] in the third quarter adjusted EBITDA came in at $5.9 million as compared to $5.8 million in the same period last year.
The improvement reflects the growth of adjusted EBITDA from the core franchise business, partially offset by a 400000 dollar decline in contribution from our owned hotels.
And $160000 of EBITDA contribution from hotels that were sold in 2018 did not recur in the current period.
The third quarter results were negatively impacted by a deceleration on the travel industry and slowing demand in our hotels in both business and leisure travel, thereby reducing our occupancy based fees such as reservations and owned hotel rent revenues.
Our mid scale in economy hotels experienced shorter booking windows compared to higher scale hotels and are impacted more quickly than by declines in demand.
And our owned hotels, we responded to these industry headwinds by reducing our operating costs.
The year over year I don't hotel performance net decline of $400000. It's primarily due to the cost of engaging third party management for these hotels, which is an increase in expense over the prior year.
Adjusted EBITDA margin for the core franchise business was approximately 34% as compared to 40% into your prior primarily due to bad debt from one large customer.
During the third quarter franchise revenue increased 7.2% to $16.2 million as compared to $15.1 million in the prior year.
The improvement in our franchise revenue was the result of an increase in transaction fees.
And new programs for reputation management and guest satisfaction.
These new programs combined with the departure from the system up some lower rated hotels have improved our online reputation scores, 2.8% year to date compare to the prior year with the largest increases coming from our economy Hotel brands.
VDI and CBD, I have 4.5% and nice N with an increase of 3%.
These increases in fee revenue were partially offset by a 620000 dollar reduction in royalty fees and lower marketing fees, primarily due to the hundred 76 terminated agreements year to date.
In the quarter, we signed 47, new franchise license agreements, bringing the total 243 through the end of the third quarter.
We've also sign another 17 agreement since the end of September .
Tenancy agreement signed in the third quarter were for our Midscale brands, which typically have royalty de escalators in the future years.
14 of our contracts in the quarter, we're also for new locations.
We are maintaining our guidance range of 175 to 210, new contract signings for the year.
The contract for all new locations Midscale and economy.
There were signed in the third quarter, we'll have faced conversion and openings over the next three to 24 month.
They will not have an impact on our 2019 revenue.
As I mentioned, our mid scale contracts typically have openings in the six to 24 months after signing and contain future royalty increases, which allow our revenue to increase without needing to increase support costs.
For instance, Midscale contracts signed throughout 2019 contributed just $100000 in 2019 royalty revenues.
And are expected to contribute approximately $500000 of royalty revenue in 2020.
<unk> increased annually by 10% to 20% for the following two years.
This royalty stream does not include marketing fees or additional incremental revenues that are generated from transactions or other franchise fees.
Franchise contracts that terminated in the quarter totaled 58 agreements.
Of which 51, we're in the economy brands.
With all terminations totaling annualized royalty contribution of approximately $1.1 million.
Year to date terminations are 176 agreements with 159 being in the economy brands.
Annualized royalty revenue contribution of the terminated hotels.
Is $3.1 million for those terminations year to date.
We expect the level of terminations were experiencing may persist through the first half of 2020.
Overtime, we anticipate we will settle into a more industry standard termination of around 10% on our economy brand hotel.
Offset by similar levels of new contract additions.
Also impacting our results with the financial challenges if one of our larger Midscale hotel owners.
This customer operates a portfolio of over 20 hotels.
10 hotels carry the areal H. brands.
We have accounts and notes receivable balances of roughly $7.2 million with this customer.
Recognized a 750000 dollar bad debt charge in the quarter, which is reflected in our SGN expense.
[noise] five of the hotels are still operating under Arledge flags true agreements with lenders or the courts, who are currently paying the ongoing franchise obligation.
She will go to health of ceased operations and the remaining three are continuing to operate under their franchise agreements.
We have completed a thorough assessment of our exposure in these receivables and at this time, we believe we have adequate adequate collateral and guarantees to support the net receivable balance.
This situation is fluid and we're working closely with the customer and our attorneys to pursue and protect our financial interests.
We anticipate that there will be further legal costs associated with this situation as it progressed.
In the quarter F G and H expense increased about 1% year over year to $8.2 million.
The increase was primarily driven by bad debt expense and associated legal costs related to the mid scale franchise customer I just discussed.
This increase was partially offset by a reduction in operating expenses and a reduction in overall compensation expense, including payroll variable compensation and stock compensation.
Over 50% over SGN expense is related to selling and support a franchise agreements roughly 5% its related directly to board compensation and publicly and public company related costs.
To remain expense includes the corporate executive team and the administrative support functions.
Finance accounting human resources and I T.
Moving on marketing and Reimbursable expense in the second quarter, we experienced we have roughly a 5% decline year over year due to lower transaction volumes and the lower overall hotel count.
The quarter was highlighted by our ongoing progress in the effort to sell our company operated hotel assets.
As previously announced we've entered into a nonbinding agreements to sell our Atlanta, Washington, D.C., Salt Lake City, and Anaheim hotels.
These sales are anticipated to generate Chris gross proceeds of approximately $85 million.
And net proceeds to the company, a 32 million to $36 million after hotel debt repayments and joint venture distributions.
We're working through due diligence items with the buyers and are working hard to get these close by year end. There's some sales may move into Q1 of 2020.
These four hotels contributed 5.1 million and 6.3 million of adjusted EBITDA for the nine months ended September Thirtyth, 2019, and 2018, respectively.
And $7.5 million of adjusted EBITDA for the full year 2018.
In revenue they contributed $25.3 million and $26.2 million for the nine months ended September Thirtyth, 2019, and 2018, respectively.
And 33.8 million of revenue for the full year of 2018.
With respect to our balance sheet as of September Thirtyth 2019, we had approximately $55 million of indebtedness.
We finished the quarter with cash and cash equivalents of roughly $21 million, including $7.3 million held by our joint ventures.
Our net debt to trailing 12 months EBITDA for the second quarter was 2.6 times.
Adjusted free cash flow for the first nine months of 2019 was 3.8 million as compared to a deficit of 15.7 million for the same period last year.
The year over year improvement is largely related to distribution to joint venture partners in the first nine months of 2018 that did not recur in 2019.
To conclude our prepared remarks, we are revising our outlook for 2019 based on our performance in the third quarter combined with industry trends and market conditions that are impacting our business.
Selling general and administrative and other expense guidance is being suspended well management in the board are reviewing improvements to our cost structure.
Our current pace of terminations, coupled with the underperformance of our owned hotels has prompted us to reevaluate our adjusted EBITDA outlook for 2019.
As such we are reducing our adjusted EBITDA guidance to a range of 11 and a half million took 13 and a half million from the prior 20, and a half million to 22 and a half million dollar range.
The reduction in our adjusted EBITDA guidance reflects our performance to date and our outlook for the fourth quarter. As a reminder, the guidance does not include or contemplate the impact of additional hotel sales.
As we close on our hotel sales.
We will file an 8-K, and we will update our guidance for inter quarter activities. During the subsequent quarters earnings call.
As I previously mentioned, we are maintaining our guidance range of 175 to 210 for our new franchise license agreements to be signed in the here.
And the interest in our canvas integrated systems is continuing we expect to finish the year with 10 executed deals.
That concludes our prepared remarks, and we'll now open the call for questions from analysts regarding our third quarter financial results.
Thank you we will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad.
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One moment, please well we pull for questions.
Thank you. Our first question comes from the line of Eric Wold with B. Riley. Please proceed with your question.
Thank you a few questions. He is one piece maybe walk us through over the past three months, how this materialize in terms of these significant underperformance.
From hotels versus you know that the EBITDA guidance you reaffirmed you know three times are twice and reaffirm back in August maybe kind of walk through a time on a good really helping teacher and this does much within just short amount of time without any.
Got it mid quarter announcements or not.
Greenhouses by the company.
Yeah, Thanks for joining us today, Eric [noise].
Never to areas that really impacted us and it started late in the third quarter and it was a deceleration in the market trends for primarily occupancy.
In our owned hotels and in our franchise portfolio.
Wow.
Our economy segment. Our HDR has mange has remained strong compared to index occupancy has declined compared to our competitive set and the same has happened in our midscale hotels.
That impacts for Midscale hotels, both royalty revenue marketing revenue and our transaction fees and for economy hotels, it really impacts our transaction fees and our owned hotels in the same way for hotel revenue.
The majority of our hotels are located in you know tertiary secondary markets and so they get hit and we see the impact on those much sooner than we would see on other hotel other major markets.
You know the Midscale and economy booking window in the industry is 20 to 23 days, whereas luxury and upper upscale window is 33 to 38 days in advance bookings.
So it.
The trends, we see our happen very quickly.
The opportunity for US is that as we can grow our hooked hotel portfolio into those larger markets, we will be less susceptible to those market trends.
Okay. So I'm still struggling here I mean, almost a $10 million reduction than EBITDA.
From where you previously word you said, while these came up late in the third quarter.
So maybe give us a sense is going to what your internal budget was for EBITDA for Q3 Q4 to see kind of how much really came out of Q3 versus Q4 would be helpful.
Yeah, if you.
You're looking at our guidance and where we are right now and compared to the analyst expectations. You can see that a majority of larger portion of this impact is in Q4, when you adjust Q3 for the $750000 to $800000 of expenses related to our one large.
Customer.
The majority of that's a larger portion of that downward trend is impacting in Q4, as we see those trends carrying into the fourth quarter.
So if we look at <unk>.
I appreciate you give us the numbers for the poor company for hotels are currently in.
Prosser being sold maybe within that you would call it 12 enough million or guidance at the midpoint.
If you assume all four hotels are sold is wasn't two remaining one do you expect to sale you know what would be the adjusted EBITDA for the remaining company that that would be helpful. Instrument gauging kind of what are your value for a company is once those are gone.
Yeah, I don't have the adjusted EBITDA for the four Olympia and Baltimore in front of me at this moment, but I really appreciate that insight and we will look at getting additional guidance out on that.
Okay Funny question for me Oh.
Oh, the four hotels currently in sale process any issues underlying their performance and is there any risk that's something good the rail those sales from growing happen given what's happened with your other owned hotels.
[laughter].
Yeah, the put the underperformance because those hotels, we are forecasting them to be in the system through the end of the here.
The majority of these sales it you know based on the current timeline are going to happen late in the fourth quarter.
So.
The impact is going to before we have included them in the our guidance for the full period.
In terms of the sale process. They are still nonbinding agreements and we are continuing to work with our owners through due diligence and do not currently see anything that would prevent closing of those transactions.
Right. Thank you.
Our next question comes through line of Brian Dobson with Nomura Instinet. Please proceed with your question.
Hi, good morning, So just wondering.
Good morning, I, So just real quick on on terminations and system Road.
I guess related to this one large customer in the third quarter do you have for can you identify now any other potential.
Hi, guys threats.
Or rather exposure to similar large customers that could potentially be in difficult financial circumstances.
That's a great question.
Absent this owner our portfolio of hotels says about 17% of the portfolio of our hotels that are owned by owners that have multiple hotels in our system. Most of the remainder of those are one two or three hotels and they are in the economy segment versus the Midscale segment. This is the only.
Owner in the Midscale segment that has multiple hotels with us at this time.
Our Midscale segment contributes about a third of our royalty revenue I'm. So if we had a current active.
Economy owner with two or three hotels that would not have a significant financial impact.
So so I take it that the remainder of your ownership basis highly decentralized is that a fair statement.
Yes. It is.
Okay and then excluding this this event in the third quarter.
Which appears largely onetime in nature.
What's your outlook for system growth in 2020 on a on an adjusted basis. If if you would never had this large one time event.
Yeah. That's a great question also and you know we are looking we typically give our 2020 guidance when we do our earnings release at the end of the here also with the change in management and our can are focused on.
Improving our cuts our relationship with our franchisees accelerating our sales growth reallocating resources.
We will be looking to give that future guidance in the upcoming month.
But what would it be fair to say that it would be probably in line with the system growth that you were looking for at the beginning of this year for this year, excluding the event.
[noise] dig the the piece there Brian that is a mix is the other piece that we are really focused on as Bob mentioned in his comments is stemming the the tide of the terminations and so we have.
Two competing factors there well that we are focused on accelerating our franchise sales growth and stemming that termination tide both of those will impact the future royalty revenue.
And.
We would want to when looking at what we were guiding for at the beginning of 2019, I think we need to take time and get that correct for 2020, before we announced that publicly okay fair enough.
So switching over to canvas or how does the shift in management effect that aspect of the business are you as committed to it.
That's a great question we have.
We had a solid team that has worked on Kansas since the beginning and the inception. In addition to you know that core team led by Gary Sam's who is our chief operating officer.
We we have the board support in Canada, but.
But as I mentioned, we look at having approximately 10 contracts signed by the end of this year and as we've said this is still in a test phase and don't expect to see large growth or contribution from campus in 2020.
Great and then and then a question as it pertains to the board.
Does the board see this as a you know in HR event.
Looking for replacement for for the CEO or do you see this more as a strategic review of the company or on the.
Oh I'm going to.
Numbered altogether.
Hi, Brian It's Bob Wolf.
As you know, we we have been on the us up like a pass for some time.
We have successfully sold the majority of our real property.
And as our or direction is all about it's all franchise all the time.
So we're looking for lead or that can help us to do the things that I'm not sure and enjoy reiterating which is in the first case deliver superior value to our franchisees. We think we have a business model, but does.
That is.
Great business proposition so.
We need to.
Got a sales force that will accelerate growth there, we need to curb where current franchisees.
We need to control costs will go to leader, who will help us to do though.
Okay, great thanks, very much but.
Oh, Yes, Brian you know I read joined the organization in January 2019, and I rejoin because I really believe there is a great opportunity.
For financial growth and with this management change you know, we will have additional opportunities to improve shareholder value and accelerate that growth.
And I'm very excited about the future.
Thanks very much.
Our next question comes from the line of Alex Fuhrman with Craig Hallum. Please proceed with your question.
Great. Thank you for taking my question I was wondering if you could elaborate a little bit more on what was causing the be trying to your franchisee base do you have a sense of have have owners been joining other systems that have terminated their agreements and has the acceleration in that churn did that start.
Late in the quarter as well as you were seeing that Youre. Your company owned hotels were beginning to decline.
Good morning, Alex Thanks for joining us again.
You know the in the trend piece quarter, three terminations are actually lower than quarter, three 2018 terminations.
The terminations were much higher though in the first half of the year.
At compared to the prior year.
As we mentioned in Q2 the trends still holds similar for the economy hotels.
That the majority of those hotels are going independent and the remainder are going to you know one or two handful of deferred they're going one hotel to a different brand no. One brand is taking a substantial portion of those.
There are a couple of things internally that are you know moving those determinations are and you know that is focusing on hotels that are not positively contributing to the brand or meeting their financial obligations.
But in in that vein I think what's really great. An important is what Bob mentioned in his comments, which are we recognize there is opportunity and focusing on the contribution we deliver to the hotels and focusing on those franchise owners satisfaction and how we.
Our supporting them to be able to impact that termination rate in the future as well as impact and helps support our accelerated franchise growth that the board and management are both focused on.
Okay that makes sense. Thanks, and then I'm just as far as the CEO search goes can you give us a sense of how long that process is expected to take and and you know are you looking to move quickly there or is it really more about finding the right candid it I'm just curious.
You know with with with the you know these sales on going on and other assets that that are likely to be sold as there is there a sense of urgency to fill that position or or is it really more about waiting for the right fit.
Alex It's Bob Wolf again.
Well, we've got Jake Bryce as chairman of our or search Committee.
And we're focused on getting the right person.
We don't see.
There's no fire drill.
We'll take her time, we'll do it right.
We're going to go to lever that can help us meter objective. So we have a lot of confidence.
And Gary Julian Tom I'm with Jake they're hoping to be our liaison on that day to day basis were well covered thank you.
Okay. That's helpful. Thank you very much.
Thanks, Alex.
We have reached the end of the question and answer session Mein Schiff wouldn't I would now like to turn the floor back over to you for closing comments.
Great I really want to thank everybody for attending our Q3 earnings call and if you have any further questions related to the Q3.
Earnings or financial performance, please reach out to our Investor relations contacts.
Thanks, and have a great day.
This concludes today's teleconference. A replay of today's conference will be available until November 22nd 2019.
You may access the replay by dialing 87766, 06853 and entering conference I'd 13695 406.
May disconnect your lines at this time. Thank you for your participation and have a wonderful day.