Q1 2024 GreenTree Hospitality Group Ltd Earnings Call

Participants

Rene Vanguestaine; Investor Relations; Christensen Advisory

Alex Xu; Chairman of the Board, Chief Executive Officer; GreenTree Hospitality Group Ltd

Selina Yang; Chief Financial Officer; GreenTree Hospitality Group Ltd

Ellen Zhao; Financial Director; GreenTree Hospitality Group Ltd

Nan Fang; Analyst; QX Capital

Betty Du; Analyst; UBS

Alpha Wang; Analyst; Goldman Sachs

Bruce Mi; Analyst; UBS

Presentation

Operator

Good day and welcome to the GreenTree Hospitality Group's first-quarter 2024 financial results conference call. (Operator instructions) Please note this event is being recorded.
I would now like to turn the conference over to Rene Vanguestaine. Please go ahead.

Rene Vanguestaine

Thank you, Betsy.
Hello, everyone, and thank you for joining us. GreenTree's earnings release was distributed earlier today and is available on our IR website at ir.998.com as well as on PR Newswire services. As a reminder, we also posted a PowerPoint presentation that accompanies our comments to the same IR website.
On the call from GreenTree are Mr. Alex Xu, Chairman and Chief Executive Officer; Ms. Selina Yang, Chief Financial Officer; and Ms. [Ellen Zhao], Financial Director.
Mr. Xu will present the company's performance overview for the first quarter of 2024 and Ms. Yang and Ms. Zhao will then discuss financials and guidance. They will be available to answer your questions during the Q&A session which follows.
Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21(e) of the Securities Exchange Act of 1934 as amended and as defined in the US Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminology such as may, will, expect, anticipates, aims, future, intends, plans, beliefs, estimates, continue, target, is or are likely to, going forward, confident, outlook, and similar statements.
Any statements that are not historical facts, including statements about the company and its industry are forward-looking statements. Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known and unknown risks, uncertainties, and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance, or achievements to differ materially from those in the forward-looking statements. You should not place undue reliance on these forward-looking statements.
Further information regarding these and other risks, uncertainties, or factors is included in the company's filing with the US Securities and Exchange Commission. All information provided, including the forward-looking statements made during this conference call are current as of today's date. The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or otherwise, except as required under applicable law.
It is now my pleasure to introduce our Chairman and Chief Executive Officer. Mr. Alex Xu. Mr. Xu, please go ahead.

Alex Xu

Thanks, Rene. Hello, everyone, and thank you for joining us today. Overall, we delivered some significant improvements in the first quarter with substantial increases in both operating and net incomes. Conditions in our hotel businesses were mixed as consumer behavior continued to evolve in a more competitive environment while we are continuously upgrading a large portion of hotels in our portfolio. Against this scenario, we managed to deliver a 8.8% revenue increase year over year and a 21.1% increase in hotel adjusted EBITDA. We believe our business metrics will improve as we are completing these upgrades and open more new hotels.
We made further progress in the repositioning of our restaurant business with an absolute focus on robust profitability. We grow our network of franchisees as we further expanded the number of street stores. We have completed our closures of the restaurants in the supermarket to anchored regional shopping centers due to less foot traffic to our stores. We have now completed this phase our forward strategy and are focused on store count growth again in regions where we have a strong brand recognition.
Please turn to slide 5. Compared with the first quarter of 2023, hotel RevPAR was RMB114, that's down 4.6%. And the restaurant ADS, average daily sales per store, was RMB5,525, down 8.7%. Total revenues were RMB352.2 million, down 7.1%. Hotel revenue reached RMB274.8 million, that's up 8.8% attributable to the recovery in the RevPAR of our L&O hotels and restaurant revenue decreased to RMB77.7 million as we continued to execute on our strategy to reposition this business.
Income from operations increased to RMB72.2 million with a margin of 20.5%. Net income was RMB57.3 million, that's up 76% with a margin of 16.3%. Adjusted EBITDA, that's non-GAAP, was RMB109.4 million, that's up 17.2% with a margin of 31.1%.
Slide 6 shows detailed numbers for total revenues, income from operations, net income, and adjusted EBITDA.
Slide 7 shows the trend in our quarterly operating performance in the first quarter compared to a year ago RevPAR for our L&O hotels increased by 8.9% to RMB157. However, RevPAR for our F&M hotels decreased by 4.9% to RMB113.
ADR for our L&O hotels increased by 2.8% to RMB235 And ADR for F&M hotels increased by 0.7% to RMB167. Occupancy at our L&O hotels increased by 3.7% to 66.6%, and occupancy at our F&M hotels decreased by 4% to 67.9%.
Slide 8 highlights the growth in our membership programs, which accounted for most of our direct sales. Individual memberships grown to 93 million, up from 78 million a year ago. And the corporate memberships grew to 2.07 million, up from 1.95 million a year ago.
Slide 9 shows the operating performance of restaurants with ADS down 8.7% year over year at RMB 5,525, but up sequentially. That's mainly due to seasonality.
Starting with slide 11, our review the results of our strategic execution across our businesses. In our hotel business, we further expanded in the mid-to-upscale segment and increased our penetration in Tier 3 and lower cities in South China.
As you can see on slide 12, we continue to grow our mid-to-upscale segment with 498 hotels, that's 11.7% of our total portfolio at the end of the quarter. While the mid-scale segment remains the core of our hotel business at 69.1%, the economy segment ended the quarter at 19.2%.
Please turn to slide 13. We continued to expand into Tier 3 and the lower cities and the 71.8% of hotels in our current pipeline are in such cities and we will further capitalize on the substantial opportunities in such locations.
On slide 14, we continued to focus on increasing the profitability of our restaurant businesses. Our strategy is a three-pronged, close unprofitable L&O stores, increase the proportion of F&M stores, and expand the number of street stores. Franchised-and-managed restaurants accounted for 85.4% at the end of the quarter compared to 54.5% a year ago, and street stores accounted for 44.3% compared to 31% a year ago.
Next, Selina Yang and Ellen Zhao will review operating and financial highlights.

Selina Yang

Thank you, Alex.
Please turn to slide 16. In the first quarter, total hotel revenues increased 8.8% to RMB274.8 million, compared to the first quarter of 2023. The increase was primarily due to the continued improvement in L&O hotels' RevPAR, more newly opened L&O hotels, and offset by the decrease in F&M hotels' RevPAR. Total revenues from L&O hotels were RMB122.5 million, that's up 49.3% year over year while total revenues for our F&M hotels decreased 10.8% to RMB151.2 million.
On slide 17, total hotel operating costs and expenses increased 1.7% year over year to RMB206.7 million. Among the total hotel operating costs, operating costs increased 8.9% to RMB146.2 million year over year, which was mainly attributable to higher utilities costs due to the improvement in L&O hotels' RevPAR and higher rental and personnel costs due to the increase in the number of L&O hotels and F&M hotels.
Selling and marketing expenses were RMB15.5 million, a year-over-year increase of RMB4.4 million, mainly due to the increase in business development and sales staff numbers.
General and administrative expenses were RMB38.5 million, down 16.5% compared with same quarter of last year. The decrease was mainly due to the reversal of bad debt resulting from the decrease in accounts receivable.
Turning to slide 18, thanks to the growth in revenues and the control of costs and expenses, our hotel business improved its profitability as the first quarter. Income from hotel operations increased from RMB52 million to RMB70.4 million year over year. Net income of hotels was RMB57.3 million compared to RMB35 million in the first quarter of last year. Adjusted EBITDA increased 21.1% to RMB102.4 million and core net income increased from RMB53 million to RMB61 million year over year.
Next, let me turn the call over to Ellen, the Financial Director, of our restaurant business.

Ellen Zhao

Please turn to slide 19. In the first quarter, we continued to reposition our restaurant business, closing unprofitable L&O stores and opening more franchised-and-managed stores.
Total restaurant revenues were 9 -- RMB77.7 million, down 38.9% year over year. And the total restaurant cost and the expenses decreased 14.4% year over year to RMB75.8 million.
And on slide 20, these measures led to improved profitability. Income from restaurant operations are the RMB1.9 million. Adjusted EBITDA increased 3.7% to RMB7.0 million year over year. Net profit and the core net income turned from a loss to breakeven.
Next, Selina will review the profitability of our group.

Selina Yang

Please turn to slide 21.
Thanks to the continuous and stable growth in revenue of the hotel segment and better performance in the restaurant segment, our group net income per ADS, that's basic and diluted, increased by 63.2% (sic - see slide 21,"63.1%") to RMB0.58 and core net income per ADS, that's basic and diluted non-GAAP, increased by 22.3% to RMB0.60.
Let's now take a look at slide 22. As of March 31, 2024, the company had total cash and cash equivalents, restricted cash, short-term investments, investments in equity securities, and time deposits of RMB1,517.3 million, compared to RMB1,337.1 million as of the end of the first quarter last year. The increase was mainly due to continued improvement in our operating performance, drawing down of bank facilities, and repayment from franchisees.
On slide 23, based on our performance in the first five months of this year, we've maintained our previous revenue guidance for the hotel business that we expect to grow 7% to 12% year over year [speaking]. We are withdrawing our guidance for the restaurant business given the significant revenue unpredictability resulting from its strategic repositioning.
This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session.
Thank you.

Question and Answer Session

Operator

(Operator instructions)
[Nan Fang, QX Capital].

Nan Fang

The first question is about to what's the dividend policy of GreenTree. Does the company have plans to distribute special dividend in the future?
And the second one is, can you elaborate on the strategy on our restaurants opening?
Thank you.

Alex Xu

Okay, I'll take this question, Selina. Thanks, Nan. Appreciate it for the two good questions.
Regarding the dividend policy, due to the pandemic impact, we actually suspended the dividend, continued dividend policy for a while. Now with the second year after the lift of pandemic, we plan -- we discussed a plan to continue the dividend policy like what we had before. But we have made the internal discussion. And I think next quarter, we'll make a announcement regarding this, our continued dividend policy resumption.
Regarding the special dividend, we will evaluate and see our cash position and also the [must] needs for our growth. And to the extent possible, we'll always would like to have more dividend and also share buybacks to enhance share -- the shareholders value in addition to our sound business practices.
Okay. Then with regards to your second question, the number of restaurant openings and growth for the balance of the year. The restaurant business for the first quarter and the second quarter, we have yet to complete it, but we'll see some of the trends that is more competitive in the restaurant landscape and our business model therefore, after internal discussion is being improved and we can combine the strength of our franchisees, local expertise versus -- local resources and with our standard and the high-efficient operating system and brand recognition, and we can generate a much better return to our franchised hotels. That is what we have been doing in the last quarter. And so we will plan to open, I think, 45 to 50 more new restaurant by the year end, so that's the restaurant opening business in total will -- should end the year roughly by 230-plus or minuses.
I hope, Nan, that answered your question. And as we emphasized, I think focusing on the profitability of each store and building the restaurant business on the sound foundation, I think is more important than the scale and the size at this moment. And we are -- we are actually deploying a couple of smaller teams to further explorer the business model of the restaurants.
And I would like to add one point. The restaurant ADS was down. Another reason is because we're shrinking our restaurant size. And so to make the restaurant size a little bit smaller and the operating space become more efficient. So that's another reason. I think the restaurant ADS is down somewhat, like 8-point-percent or so.
Okay. Thank you again for the two questions.

Operator

[Betty Du], UBS.

Betty Du

My question is regarding the hotel business. As there is an obvious down-trading trend among consumption in (inaudible), how does this affect the company’s RevPAR?
And are there any divergence between economy, mid-scale, and upper mid-scale segments?
Many thanks.

Alex Xu

Okay, Betty, did you -- let me rephrase. Did you ask the RevPAR trending for the second quarter because I missed that a little bit.

Betty Du

Yes, basically regarding the RevPAR and what's the impact of the consumer downtrading, especially on hotel RevPAR and whether there's different trends between economy segments, upper mid-scale segments?

Alex Xu

Okay. Thanks, Betty.
Regarding the segment, I'll leave that to Selina. But regarding the RevPAR trend, trending down on the second quarter, we observed our RevPAR for the second quarter is trending down at the same rate as our first quarter. The first quarter, we have analyzed our RevPAR drop. We find that our RevPAR dropped its cost also in large part by our substantial number of hotels have been taking out (inaudible) operation to receive the upgrade and to go through the upgrade. We typically gave six months to one year of fee reduction or waiver for the hotels going through fee upgrade. So therefore, it affected our global RevPAR and affects the occupancy as well.
So the second quarter, we'll continue to do the hotel upgrades because we have a substantial number of hotels needs to be upgraded because of the three years of pandemic. And so we accelerating the upgrading process and that will reduce our RevPAR and so we expected that we -- we expect that our RevPAR trending down the similar rate at the first quarter.
And with regard to which segment, mid-to-upper scale -- mid-scales or lower scales is trending down, I'll leave that to Selina.

Selina Yang

Okay. Thank you, Alex, and thank you, Du.
If we compare with the second quarter of last year, for example, we use a year-over-year growth rate as the indicator where we find -- okay, the indicator for the mid-scale segment is best -- is better than mid-to-up scale followed by the economy hotels. And basically, for our hotel -- for our company, our ratio in the economic segment takes the largest portion of our total portfolio, so I think that maybe has a impact on our total performance.

Operator

(Operator instructions)
Alpha Wang, Goldman Sachs.

Alpha Wang

I have two questions, if I may. The first one is, given you just mentioned in first quarter and second quarter to date, the RevPAR has been slightly down year on year, but we maintain our full-year revenue guidance unchanged so could you give us a sense of what full-year RevPAR we are looking at and what are the driver to achieve the full-year revenue guidance? Thank you.

Alex Xu

Okay, thanks, Alpha.
Even though the RevPAR is trending down for the first and second quarter, our revenue consist of the existing hotels, the revenue -- the existing hotels and also add new hotels. And in addition, we also have some very good performing and L&O hotels that adding together the hotel, the total revenue, even though with a drop of the RevPAR for the existing hotel portfolio, the increase the revenue in the L&O hotels and also the F&M hotels is more than make up the loss in the existing hotels revenue, the RevPAR, so our L&O and the new F&M hotels revenue will increase about 12% or so to 15%. That's according to our analysis. So taking down the RevPAR decrease, so you blend them together, I'm using ballpark numbers arriving to 7% to 12% revenue increase for the year.
For instance, some of our F&M hotels, we have introduced the new boutique brand already performing excellent in certain regions. For instance, in the western part, one of our newer brand became the star in the region -- in the entire region within in low season, we have achieved a RevPAR of RMB2,000 per room per day and expect in the high season over RMB4,000 per room per day. So those are contributing to the revenue increase for the hotels.
But on the other side, the restaurant, we expected revenue drop in total to our 50%. So the groups and previously we didn't anticipate the restaurant competitive increased at less -- at least in the position -- in the locations to where we are operating dramatically, for instance, we have a large number of restaurants in the supermarket the anchor, the regional shopping centers. We observed least of foot traffic to our stores decreased a lot. And plus those restaurants has a large size -- in large area size, large footprints. And therefore, we made a strategic decision to reduce the exposure in those locations and then expanded to franchise and manage the restaurant business where we only collect a fee.
So that's resulted in the total revenue for the restaurants side is 50% down. So combined that will drag the entire group's revenue down a little bit but however, because of the restaurant repositioning, the profitability and at least -- and then the EBITDA, you get a boost and increase. So our total bottom-line performance will be enhanced. So we hope we will build our business both the bottom-line and that top-line growth. So that's our RevPAR for the full year impact to our revenue.
I hope, Alpha, that answered your question. Thanks.

Operator

(Operator instructions) Nan Fang, QX Capital.

Nan Fang

Hello, management. I have other question for you. Can you speak a little bit about your expansion into the higher end segments? Thank you.

Alex Xu

Okay, Nan. We have increased our mid-to-upscale segment continuously, and we have several brands that we are continuously improving the standard for both of the products and the services such as GreenTree Eastern. And we also systematically closed some of the less desirable location -- located products. And as a result, I think that will continue to have a positive impact on the group's ADR.
For instance, we reported to you that L&O hotels because most of our L&O hotels, leased-and-owned, are in mid-to-upscale by GreenTree's turn. And there you can observe -- you can see our performance has increased dramatically and this will showcase for our potential franchisee to develop more similar branded hotels. And then in addition we are also developing some cultural-based boutique hotel brand such as if you check the snow hotels, we developed and has already become the local the regional hotel star and combined, I think with a combined efforts and (inaudible) resources to put into that area, we hope and we think that the mid-to-upscale segment will become a larger and larger portion of our business and that we're confident that after the pandemic era is gone, we can focus on developing that -- in that segment. And we'll have more I think that positive news report to you the next quarter.

Operator

(Operator instructions)
Alpha Wang with Goldman Sachs.

Alpha Wang

Thank you. And another follow-up question is on the hotel expansion site. Could you kindly provide an update of what kind of hotel opening target we are looking at this year and if we break down by L&O versus F&M, what are we targeting?
Thank you.

Alex Xu

Okay. Alpha, that our -- like when we put the last time, the total hotel opening we planned for the year is 480. Primarily, I think 99% of them are going to be franchised and managed. And so we may still do a couple of them selected very, very few and showcase L&O hotels. But our focus has always been on the franchised and managed hotels.

Operator

(Operator instructions)
[Bruce Mi], UBS.

Bruce Mi

I also have a question regarding the hotel openings. So could you please give us a breakdown -- geographic breakdown of the new openings? For example, how much will be in Tier-1 cities and how much revenue in lower-tier cities?
Thank you.

Selina Yang

Thank you for your question, Mi.
Yes, actually, for -- among the 480 hotels to be opened this year, I think most [SPO] in the Tier-3 and lower cities that is about 62% to 65%. And about 15% to 20% new open hotels in Tier-2 and the remaining hotels to open in the Tier-1 cities.
Thank you.

Alex Xu

And to add on that, Bruce, that we have a team that used to be to be very strong in the eastern region, but we are enhancing the team, building the team nationwide where we have that more whitespace in southern part of China like South Eastern, South Southwestern China, and also North Eastern. We have added more [development] members and we're seeing great results. So our close to 500 new hotels can be evenly -- hopefully we hope are going to be evenly spread -- more evenly spread across the continent of China.
And the business development is a driver after the pandemic, so we're focusing more and more even though the six strategies we had historically made our company continuously profitable and other than some of the pandemic area are continued improving the existing portfolio and building showcase hotels and continue to enhance our technology delivering and enhanced the efficiency of our operation because our margin that's a safety still among the best in our service businesses. We want to continue to improve on that. In addition that will continue to enhance our membership benefit and program which will increased hopefully the percentage of the membership contribution in the future as well.
So with all of that, combined with our repositioning of the restaurant business, and we'll have all lines of business are contributing to the company's profitability and bottom line and we're in a stronger foundation now I think to grow the business that continuously. And we -- that's the reason why we also have a share buyback and plus as we answered earlier, I'm having continues dividend policy reinstated -- planned to be reinstated so all of that, we hope that we have -- we can enhance our shareholder value and that building a stronger company for both the franchisees, customers, as well as our employees' career growth.
Okay. Thanks, Bruce, for your great questions.

Operator

(Operator instructions)
This concludes our question-and-answer session. I would like to turn the conference back over to Selina Yang for any closing remarks.

Selina Yang

Thank you, operator.
In closing, on behalf of the entire GreenTree management team, we thank you for your interest in GreenTree and your participation in today's call. If you require any further information or have plans to reach us, please feel free to contact us.
Thank you again. Thank you.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.