Safestay (LSE:SSTY) — Interim Results

0:01 Good morning and welcome to the SAFESTAY PLC Investor Presentation. Throughout this recorded presentation, will be in listen only mode. Questions are encouraged and can be submitted at any time by the Q and A tab situated on the right hand corner of your screen. Just simply type in your questions and press send. The company may have been in a position to answer every question it receives during the meeting itself. However, the company will review your questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Peter Zilker, COO. Good morning, sir.

0:34 Thank you very much, and good morning to everybody, and welcome to our presentation sharing our half year results for the first six months of twenty twenty three from SAFESTAY hostels and hotels. Thank you for tuning in this morning, and thank you very much for your interest in SAFESTAY PLC. Presenting today is my colleague, Paul Hinxton, chief financial officer, and myself. As for myself as a brief introduction, I joined SAFESTAY just under a year ago. My background of the last thirty years in hospitality industry is mainly branded hotel background. My last role was a director was director of operation for a UK company looking after their Southern UK and Central UK properties, mainly Holiday Inn, Holiday Inn Express, and Marriott branded properties. And before that, I worked in various countries, mainly for branded properties as well.

1:33 What attracted me to join SAFESTAY just under a year ago, I said, is is the the fantastic property portfolio we have, but also this somewhat niche market of the hospitality industry, which offers fantastic opportunities to grow, to to push further ahead. And, of course, SAFESTAY is in a fantastic position to do exactly that. And I think by my background, I can bring a lot of of this experience to the table. And perhaps I can hand over to Paul for a brief introduction. Paul? Hello, everyone. So I've been in hospitality for over twenty years, held a number of CFO roles, and covered various types of hospitality.

2:19 So like Peter, I was attracted to to SAFESTAY because of the real potential in this market and the strong brand and positioning that SAFESTAY has. I'll now hand back to Peter, who will carry on with the presentation.

2:35 Yes. Thank you, Paul. Before we're going into the details of the first six months of this financial year, let me give you just a very brief overview of the market we are operating in and also a very brief market following on that slide about SAFESTAY itself. The global hospital market was valued at just under USD 5,000,000,000 in 2021 and expected to reach just under US$89,000,000 by 2027, so in about four years' time. So as mentioned earlier, you can see it's still a huge potential there. The unique difference within the hospitality industry, so the hotel market, the hospital market offers, is that it's a hugely fragmented environment.

3:22 There are only a few companies which operate with a centralized approach like SAFESTAY, usually or mostly these main competitors who operate a central approach are very country single country focused. There's a strong competitor in Germany and also in Spain, but it's fair to say that SAFESTAY is the one of the few which offer a true Europe wide portfolio, which is, of course, attractive to customers who traveling various destinations across Europe. And we certainly have the interest to remain this true Europe wide portfolio or further afield for that matter. SAFESTAY itself, we started in 2014.

4:08 So we have our ten year anniversary next year with one hospital here in London. Our main office is, of course, still London with another support office recently opened in Warsaw, and I will talk about that a little bit more later on. We currently operate 16 properties, four in The UK and 12 on the continent, and all combined offer 3,251 beds every day to the market. Unsurprisingly, our core segments are Millennium and Gen Z customer segments, but also the group travel, families, etcetera. And in particular, that segment, the group travel offers a huge opportunity for us to recover to pre pandemic levels.

4:57 Again, some more details about, the segmentation of our customers, will be shared later on, in that presentation. With that information, may hand may I hand over to Paul, who talks us through the financial details of the first six months of this financial year. So so let's just start off with an executive summary. So you can see that the average bed rate has increased to 23.4 from 21.5 in 2022. So that's a 9% increase, and actually a 20% increase over 2019.

5:45 Occupancies increased to 68.5% from 51%. And you can see that was actually less than 2019. It shows there's still strong potential for growth. Total revenue was actually 44% up on 2022 and thirty percent up on 2019. EBITDA was only a slight increase of 100,000, and I'll talk about that and and explain why there's a a smaller increase in the sales after this. And then cash at bank is up by 40% to 7,300,000. So that's a really strong performance.

6:35 So I'll now look at the income statement. So there's a continued strong performance. So gross profit was up by 35% with room revenue growth, which offset the high current food price inflation. And then in terms of why the EBITDA hasn't increased as much compared to the level of sales increase, payroll costs were up by 800,000 compared to 2022. And in 2022, because of the difficult recruitment market, payroll costs were abnormally low. So this is a one off hit. Also, utilities have increased by 300,000 compared to 2022, But we've just signed new two year electricity contracts in The UK to save £200,000 annually, and we expect costs in Europe to come down as well. So again, the that will is a one off hit.

7:34 Then in terms of our balance sheet, we've got reduced net debt position. So borrowings reduced by 1,100,000. Gearing is down to 54.8%, And also cash balance improved by 2,000,000. This shows that there's cash and debt headroom available for acquisitions, and we're in a strong financial position to actually take advantage of opportunities that we we're buying. And just to emphasize, the three holes non lease value was valued at £38,700,000 so we've got a strong asset base as well. And now if we just look at cash flow, cash flow has improved, so cash generated from operations was GBP 5,000,000. And through careful working cash capital management, we've increased the cash flow by GBP 2,800,000.

8:23 CapEx was minimized in the first half of the year at 200,000. We plan to increase spending in the second half of the year. And then we've had debt repayments of 500,000. Also, there's significant headroom on bank covenants. So again, it shows the strength of our financial position.

8:41 And then just looking at our debt. So our primary loan is actually paid in January 2025. So we started the refinancing process and expect the terms that we achieved to actually be similar or at least better.

9:00 Then if we just look at our asset base, in 2021, we actually sold a couple of our hospitals due to the COVID, and we actually see really strong EBITDA multiples on those, which shows the strength of our portfolio. Also, our net bank debt has reduced by 3,200,000 to 9,200,000, and there's also a breakdown of the three holds for long leasehold valuations. And then net asset value per share is 41.6 against last night's share price of $20.16.

9:36 Then one of the things that the business is is preparing for growth. So in terms of the finance side, that means we've brought all the accounting in house. We're moving our accountants to overseas accountants to PKS, which create consistency and uniformity. We've put moving to Santander and their banking partners so that we'll be on one single banking platform, which create efficiencies. We've introduced a new invoice approval system which will give us better financial control and better cost control as well. And then we've increased our forecasting and mod modeling, so we've got much better analysis to improve our financial performance. So I'll hand back to Peter now. Thank you, Paul, for this summary on the financial highlights of the first six months this year, which are certainly pleasing to see. Let me give you now a few operational highlights from the first six months within SAFESTAY.

10:40 The first half was very much a period of system enhancements to create or to enhance the platform for growth for the future, not only for the rest of 2023, but certainly also for '24 and beyond. So there are a few elements I listed here on on on that slide. And besides the website, there are three I want to point out in particular. The website has been launched as live now for about two months and receives a fantastic seat pack and is absolutely crucial to convert these direct bookings and to retain customers brand loyal to us. But the other three elements I want to mention here, the first one is the SAFESTAY commercial hub. We opened a support office in Warsaw in August, around four or five weeks ago, and this office has been established to drive proactively, group business in particular, but also the other sales and marketing elements.

11:43 The office is set up. Ken is responsible for all 16 properties and can respond in five different languages to to inquiries from anywhere in the world for any property we have across the estate. So this is a major change in our way how we handle bookings and how we drive our business, the group business in particular, forward. The other system we implemented in the first half of this year is a yield management system called PricePoint. The yield management system is checking it's it's also best known perhaps as a demand based pricing system, perhaps best known from the airline industry as the demands go up, prices change, etcetera etcetera.

12:30 This is a a since it's a real game changer for us where each bet we offer on a daily basis in all hospitals get evaluated by this by this system and priced new every two minutes if the demand has changed either upwards or downwards, of course, within parameters we set ourselves in the system. So this, there was a test phase which started in March 2023, and all systems have gone live in June this year. We see the first results, positive results on that, but I'm I'm convinced that our revenue per available ad audit and the average bet rate will improve also because of the yield management system we installed. Last but not least, I I want to mention here is a system in the human resources arena we installed in the payroll system called UKG Kronos.

13:26 This system will give us a centralized view on payrolls, real time view on scheduling, and efficiency. Key performance indicators like revenue generated by our work will play a big part going forward. The UK and Austria, the setup is ready, and the go live date for that is November this year and will obviously help us in in recruitment. But most important, also in retention because it's all electronic and digitalized on that level. But clearly, it has also a focus to be more payroll efficient as we go along.

14:12 In the first six months of this year, we sold 403 just under 404,000 beds. This is up 41%. So we sold a 118,000 beds more than the previous year. So that's that's a great result. So occupancy is really strong. As Paul mentioned, we are at 68.5%, not quite where we were at 2019 where we ended the first six months with 71%. But what is extremely pleasing is that our average bet rate has improved by 9%. So every bet we sell, we sell 9% more expensive or receive a higher yield to £23.44. A key industry measure is the revenue the accommodation revenue per available bed.

15:06 So this measures the accommodation revenue we achieved of per day out of all the 3,251 beds we sell on a daily basis. And, again, combine and this combines the occupancy and the average rate in the calculation. So it's an extremely pleasing result and some somewhat also already seeing that our yield management system we installed earlier this year has some impact, perceived perceived positive impact as we improved the 46% to £16 and three bets. So basically, each bet we have in the portfolio generates that amount per day on a daily basis. The cost cost because of the higher revenue, of course, the percentage is is is somewhat favorable compared to last year because we increased our revenue substantially.

16:01 So it's, at the moment, 27.6% of revenue versus 28% last year. But as

16:07 Paul mentioned, now the recruitment market has stabilized. Our retention rate is certainly much more stable than it was in 2022 or before that, where the hospitality industry had a particular tough time to recruit and retain personnel, but we now have a very solid area management team and a very solid general management team who who run the properties across the estate. One word to online travel agents, OTAs. OTAs is is somewhat a love hate relationship between the hospital operators, hostels or hotels, and OTAs. They are a massively important source of our bookings, of course, but they are very costly source of bookings as well. At this very moment of time, around 70% of our bookings are made through OTAs, and this adds a commission bill of 700,000 £720,000 to our cost line. So that's a huge element, of course.

17:14 And systems, mentioned earlier, or the office in Warsaw I mentioned earlier, are absolutely designed to counteract this development and bring the 70% down to to another level and to increase our bookings generated by our own booking engine. And on the right hand graph, you see, bookings generated by our own booking engine compared to last year in percentage term, the orange line, and the blue line, which is this financial year up to September. And you see that we're generating more bookings direct through our own booking engine because of various activities we have in place. And this includes the new website. This includes direct marketing, but it also includes meta search advertisement on Google apps and engaging

18:06 in with a company called Tripty's who supports us in driving and retargeting and direct advertisement on Google, etcetera. So at the moment, groups, just one word on that, groups generate 13% of our total revenue.

18:26 Pre pandemic, we were at 38%, so there's a huge opportunity. And, the Warsaw commercial hub and the group office is totally designed to close that gap and to capitalize on that market. As for the accommodation split, Paul mentioned mentioned earlier that our overall revenue increased by 42%, which is extremely pleasing. And there's no surprise that this is mainly driven by accommodation. And here in particular, well, more by occupancy, but also by 9% average rate. So the growth of accommodation revenue was 44% to last year to 9,500,000.

19:14 But it has to be said, there was a weak quarter one twenty twenty two where we capitalized obviously on this year. But we're also very, very pleased how the second quarter performed where we consistently outperformed the previous year. SMB contribution was GBP 611,000 to the total revenue, a growth of 23% year on year. It's a very costly revenue stream, especially with the inflation with the with the high inflation figures we have across Europe. It it was somewhat a challenge to keep the costs in line, so the items we buy for the food and beverage offering and then consequently to sell them. But I'm very pleased that the first results or the first activities we put in place earlier in this year in quarter two in particular saw the F and B cost of sales reduced from 44% of food and beverage revenue down to 39%.

20:20 So a drop of 5% of costs in this revenue stream, which is very, very pleasing. We want to be closer to 30%, so there are certainly more room for improvement, which will come later this year. One brief note on other revenue, relatively small contributor, only £311,000, but a very profitable revenue contributor. Other revenue includes luggage storage, laundry, commission from travel agents when we sell tools, etcetera, and all that. We we managed to increase the profit contribution out of £311,000 to 89%, which is 99% better than last year.

21:11 And we particularly managed that with new luggage

21:15 rooms we installed. We opened a new luggage room in London, Alexander Castle property, where we also offer luggage storage for nonresidents. We're new luggage room facilities in Lisbon as we speak, the same in Pisa and also in Athens. So there are huge margins to be made. Cost is almost zero in-depth in the luggage world, and it's it's a huge revenue contributor. But also from laundry facilities, up to now, we operated on a revenue share model where a contractor supplied machinery. We are now going into our own machinery to keep a 100% of the takings, and this is where we will spend some extra capital expenditure money as Paul mentioned earlier.

22:07 The total and it's a very in the hostel market, it is not always easier to easy to compare ourselves to to other companies. First of all, SAFESTAY is one of the few which is listed is a listed company and also because of the fragmented market. One element though, which has been published by competitors is a is a a key performance indicator called total revenue per available bet on an annualized basis. So this is basically how much revenue we generate with each bet available throughout the year. And I'm pleased to say that the first half saw a significant improvement on that. We're generating £6,404 annualized with each with each bet available on the within the with the data of the first half of this year. This is over £2,000 more than last year. The UK is the strongest contributor, £6,600 per available bet.

23:14 And the South and the Central Europe region have grown equally 40%. So very pleasing to see that all three regions operate under a similar level, which somewhat derisks our business model as the economic situation in the various regions and countries are still somewhat volatile in some areas and all that. But the £6,400 total revenue per available bag sets us a as approximately 12% above a known competitor. So this is very pleasing to see. And considering that the second half of this financial year or the second half in general performs always better than the first half because we have the summer months included.

24:00 We I I'm I'm convinced that we will be able to improve on that number as well. Let me give you just two, three points on a brief outlook on the remaining of 2023, but also a quick note on 2024. As you heard from Paul and hopefully from the and seen on my slides as well, we are in a very, very strong position to deliver our revenue targets and and other targets for 2023. The average rate, average fed rate and occupancy has improved and is it will improve in the second half of this financial year. Our pace, the business we have on the books is very pleasing, and we as said, we are very confident that the revenue targets will be met later by the end of this financial year.

24:57 The business is overall with all the elements we installed in the finance team, which Paul referred to, but also in the operational side with all the systems, centralization, brand standards, which we implement. We are much more effective business, much more technology focused, and this will deliver results and will help our to control our cost line much, much better later this year and and beyond. For 2024, the revenue on the books is a very pleasing situation. And this is graph on the right hand side. The green line shows where we were at various points of the fourth quarter for 2023.

25:42 And the blue line is where we are and where we forecast to be by the end of this year. And as you can see on the 01/01/2023, we started the current financial year with CHF 2,000,000 on the books. We cautious forecast suggests we will at least start with CHF 3,000,000, the new financial year in 2024. So a very strong position to continue the growth into '24 and beyond. And this brings us to the end of the presentation. And I'll open the floor to question and answers. Peter, Paul, thank you very much for your presentation. Ladies and gentlemen, please do continue to submit your questions just by using the q and a tab, which is situated on the top right hand corner of your screen.

26:31 But just while the company take a few moments to review those questions submitted today, I'd like to remind you that recording of this presentation along with a copy of the slides and the published Q and A can be accessed via your investor dashboard. Peter Poole, as you can see, we've received a number of questions throughout today's presentation. And if I could just ask you to read out those questions and give responses where it's appropriate to do so, I'll pick up from you at the end. Okay. Thank you on that. Let me let me read through the question. The first question came through, what are the what are the main drivers to make step change in sales from where you are now? Probably for for me to answer. The the opportunity the the greatest opportunity we see at the moment is in recovering the group sales from currently 13% back to the 13% mark. Our occupancy is still below seven below twenty nineteen.

27:26 And the the commercial hub, the office in Warsaw will play a massive part in that. All the team members have been trained in that. But together with that, our our more data focused sales process using yield management systems and metasearch apps will drive that sales even forward. So growth will come from occupancy as there there are certainly opportunity there, but sale sales increase organically will income also from average bet rate, meaning a higher yield overall, which is obviously comes much more favorable in terms of EBITDA conversion. Another question. What do you think is stopping the big groups coming back since the pandemic?

28:16 And how you're confident how confident are you that they will come back? Yeah. I kind of answered the question before perhaps. UK is a massive is is obviously a massive revenue contributor contributor for us. As you saw, the four hospitals in The UK generate more than the six hospitals located in the South Southern Europe region and the six hospitals in the Central Europe region. However, the Travel Alliance hospitality organization suggested not too long ago that they are that group travel from The EU into The UK has only recovered to 61%. So, again, there is a lot of opportunity there. There are discussions in the hospitality industry with the government to make it easier for groups and education organizations to travel into The UK.

29:10 The Europe has recovered somewhat, but to pre pandemic levels, but we will chase this with our Warsaw office and are confident that we can close that gap with practice sales from that area there. Next question. Why do you think you are this is from Alex. Thank you. Why do you think you are seeing a diversifying mix of customers? Is it intentional? And do you see this demographic trend continuing? That's an interesting question. With the pressure, I mean, look, it's in all the media, the pressure on household costs, we see, of course, more families staying in our hostels. We see businessmen staying in the hostels. I was in London, Ellison And Castle the other day, spoke to some customers. They attended a conference in in in nearby the Ellison And Castle region in London.

30:15 Is it intentional? Well, yes, it is. We we still have to find the formula how to attract them more specifically. Our main our main focus will, of course, be the millennials. They are more agile, more more mobile for for that matter. But the family and business community is certainly segment, a customer segment. We we are we are what's the word? Chasing? Is this the right word? And we'll hopefully see an increase in that as well. Next question from Andy. Is further investment needed into your IT infrastructure to tailor experience further and drive bookings?

31:03 It's I'll answer that first. All for me, Paul. So you have to have have it quite easy now. Absolutely, Andy. Thank you for that question. I mean, one element or one platform we we installed in the first half of the year was a system called TrustYou. TrustYou is an online review system, which, which gathers and combines all the reviews from booking.com, Google, TripAdvisor, etcetera, in a single platform. This increases our customer engagement with our customer base. And, of course and I I I'm a great and a firm believer that if you engage with your customers, you create loyalty and you drive bookings. So we are certainly not at the end of our road from the IT IT infrastructure.

31:48 And perhaps the few points I mentioned earlier, give all the flavor that we will be a very modern data driven interest IT high-tech company, which is which makes informed decision based on data, you know, which we have at our fingertips now. Any plans to go down on the asset light model to clear the debt from the balance sheet to the share price is not reflecting the high net asset value? Paul, do you want to Yeah. I mean, didn't they? We have paid down when we sold Yenning for a hostel, the debt was paid down. But at the end of the day, our key aim is to grow the business, and acquisitions will be a key strategy in that. So that that we'd rather we think we can gain more a better return from actually growing the business and using the the capital we have to grow that business, including acquisitions, rather than actually paying down the debt.

32:54 Yeah. Thank you, Paul. Markus sent a question. Do you plan to add additional sites in new destinations outside of Europe? We are on a financially as as Paul said, we are on a financially very strong decision. Our our playground at the moment is very much Europe. We have very strong position in Spain and The UK, and these are the it's our key focus. But look, if opportunities come along, we are in a very, very strong position to to consider new acquisitions within or outside Europe, of course. But they need to make operational sense, you know, where they are located, of course. Otherwise, the cost would not make sense. Another question from Steven. Do you have plans to add to your portfolio?

33:42 And are now hostels are you now hostels and hotels? I answered the the first part of your questions before. Yes. We are hostels and hotels. We we we operate two hotels, one in Vienna and one in Berlin. They are they're operating in the three and four star sector. We believe the location and the property itself is far more suited for the hotel market in these two destinations. In Vienna, it's near the Nachsmarkt for those who who know Vienna. And also in Berlin, the client the location right next to the Kurfurstendamm and the Kadebeh attracts a clientele, which is more it's better focused on on on the hotels rather than hostels. Hence, our our extra line in the logo, as you noted, the SAFESTAY hostels and hotels.

34:40 Colm sent a question to OTA is at about 70% seems very high. What would the norm be for a hospital market? It is very high, and we're working hard and I'm with all the systems and and all the drives to reduce this reliance on OTAs below that significantly below the 70%. It's very difficult to to give an exact number of what the norm is for the hostel market, but it will be very, very high considering that most hospitals in the world and certainly in Europe operate our owner operator focus. So they are not part of a group like ourself, and single operators are often relying almost a 100% on OTAs.

35:28 To give you an idea, in Europe, there are it was estimated a couple of years ago that there are 4,800 hospitals operating. Only a 150 are operated by brands or centralized like by companies like SAFESTAY. So you can see that the other 4,500 hostels are single quite often smaller operators who are more reliant on OTAs because they don't have the brand power, which we create as we speak. We have and will create as we go forward. But, yes, 70% is high saying that in the hotel industry, if you have a direct booking channel of 25% to 30%, it's not a bad bad number either. So opportunity to save some money, opportunity to to grow customer loyalty in that respect. So I think with the the systems and the processes and and and operational standards we put in place in first six months, we are certainly on the right track to to to turn that and driving people to our own booking engine on our new website.

36:46 And that completes the question and answers. Perfect. Peter, Paul, thank you very much. I think you've addressed all those questions from investors. And, of course, the company will review all the questions submitted today, and will publish those responses on the Investor Meet company platform. But just before we direct investors to provide you with their feedback, which you know is particularly important to the company, Peter, could I just ask you for a few closing comments? Yes. Thank you very much. Look, thank you once again. Thank you for your interest and safe stay. And thank you for finding the time this morning to to and allowing us to share details of our first six months. We we are in a much stronger position. We are much more mobile, nimble and data focused as we're going into the last quarter of this financial year and certainly into next year. The financial situation is is very sound, so we are ready to to look at growth organically or otherwise as Paul said. And the growth in revenue gives us a superb platform to to drive these cost elements further down and to achieve very strong EBITDA conversion as we come to the end of the financial year.

38:00 Once again, thank you very much for your time, and to to next time. Thank you very much. Perfect. Thank you once again for updating investors today. Could I please ask investors not to close this session as you'll now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations? This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of SAFESTAY PLC, we'd like to thank you for attending today's presentation, and good morning to you all.