Q3 2019 Earnings Call
Continue to standby, we thank you for your patience.
Ladies and gentlemen, thank you for standing by welcome to the was your group Limited Q3 2009 chain earnings Conference call at this time.
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Right. After the speakers presentation, there will be a question and answer session.
During the session. It you will need to press star one.
Please be advised that todays conference is being recorded.
The conference just stick today.
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Thank you operator.
Oh, good evening, depending on where are you going to world.
To you for dialing in today.
Welcome to modules, so well into 2019 earnings conference call.
Joining us today it mid to cheat sheet, Oh, founder executive Chairman and CEO Ms., Jenny Jones, our executive Vice Chair Lady and the Michio nature I would see Apple.
It will review our strategy in the Q3 results.
Following their prepared remarks management will be available to us. So your question.
Before we continue please note that the discussion today will include forward looking statements made under the safe Harbor provisions of the United States private.
<unk> Litigation Reform Act of 1995.
Well, they moved evoke inherent risks and uncertainties.
As such our results and they'd be materially different from the views expressed the today.
A number of potential risks and uncertainties outlined in our public filings with the ITC.
Well I'm sure does not undertake any application.
Any forward looking statements, except as required under applicable law.
Oh the core today, we will also mentioned adjusted financial measures during the discussion of our performance.
Recalculation of those measures to comparable GAAP information can be found in our earnings release, that's what's distributed earlier today.
As a reminder, this conference call is being recorded the webcast conference call as well as supplementary slide presentation is available in the Investor Relations section Oh, Wow chose <unk> web site at <unk>, Our dog watch.
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Cool.
Please now turn to slide three.
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Turning to slide six.
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I want to hand over to Jim.
Well, we're walking you through our to go.
This quarter.
Thank you [laughter] Hello to everyone. Please now turn to slide eight and that's we view.
Largest three areas of strategic focus this year.
System Cool, we're continuing to rapid extension of our hotel network.
Secondly, we are focusing on innovative technology applications to improve the guest experience and all crucially.
Said, the strategic deployments, so upscale hotels.
As we turn to slide nine note the lighter blue bars on the left shows strong acceleration of our hotel openings during Q3.
More than five hotels opened every day.
People that off Q3 2018.
A lot of net increase of 286 hotels in Q3.
46% was contributed by all self brands.
We are delighted to see our real acceleration of self rents start to bear fruit.
In the first nine month uptrend in 19, the darker blue bars on the right showed that we added 921 net hotels.
About 200.
Percentage year over year growth.
As we expect future hotel extension to accelerate.
Given all the strong growing pipeline.
As shown on page 10.
We have a pipeline all from 1736 Inc. hotel.
We will then to 34% off all hotels in operation.
This ratio has improved from 23% at Q3 last year.
The strong growth is mainly osgood at too.
Franchised and Manachised business.
Which was 97% up all total open five four.
Technology is essential for <unk> sustained growth.
Today, I want to share some remarkable achievements.
First off war on page.
Oh, Oh page 11.
Oh loyalty program continued to increase and the reached 400 and a 39 million members.
By the end of Q3 29 team.
You would present or 46% pick up.
Your 2011.
[noise] secondly on slide 12.
David events booking through online travel reservation contributed about 40% of all told her booking.
For them 45 million people downloaded our largest multiple.
45 million.
And more than 25 million people off bowling hard to all we chat.
Oh, I need you to booking and a digital you called functions have attracted more and more members to choose our online reservation trying to.
The strong central reservation capabilities significantly accelerate the ramp pop up our new hotels and also held mature hotels to maintain a high occupancy.
Seth.
That's all 53% Oh transactions out it is processed through online payment.
This includes both advanced payment due a central reservation tools.
I just mentioned.
QR codes getting payment at hotels.
We offer online payment services.
Traditional credit cards.
As well as well by a payment means such as how do you pay I'm, hoping we try to pay any unionpay.
The isn't it a payment.
Significantly all customer experience when they deal with that.
Finally, I want to update you all talk was the upscale segment.
As shown on slide 14, Oh, Julian hotels, and shouldn't do Tyco Lee is scheduled to greet guests by the end up 29 team.
Three more Giuliani hotels will open in the first quarter off 2022 in Shanghai and the one Joel.
In addition next year.
Second urban hotel onto the Blue some he'll Brad will open in Shanghai.
After a very successful.
Gruesome he'll hotel in Beijing.
Let's move to slide 15.
I would like to take this opportunity to elaborate our recently announced acquisitions, all Dodge hospitality or D. H.
He is the leading German offering here with a reach heritage dating back to 1930.
[laughter] flagship brands second Burger is a reputable luxury hotel brand across Europe , North Africa, and the Middle East.
The age has five brands wandered 18 hotels seeing all creation and a 36 inch pipeline across 19 countries.
The dedicated D. H management team has multinational experience for hotel development and operations.
Yeah, Hi, forecasted it's 2019 revenue of 419 million euros, we'd like EBITDA of approximately 40 million euros.
As an enterprise value off about 700 million euros.
Relation of the acquisition, it's approximately 17.5 times 2019th full cost EBIDA.
We expect.
[laughter] growing that business the full what lockable is expected to decrease.
About can often three yet.
We expect this deal to close in January 2020 upon the completion of certain customary conditions.
[noise]. Please allow me to share all view about this deal.
First of all four let's turn to slide 16.
I think D. H is the deal off the reinstein.
As you can see.
Oh pro forma basis, assuming D. H is part of watching today.
The age accounted for 4% of Swatches rose, 27% apologists revenues and a 9% apologists EBITDA.
The transactions out there, it's approximately 7% of Hodges Lucky.
This is a deal size that these meaningful but not too big for us as a first step off going international.
Secondly, Archer and a de age for a very complimentary brand portfolio.
Most all the age Brent I positions.
Gail and the luxury segment.
That's shown on slide 17.
Most acquisition each will account for 79% all swatches rooms in luxury and Upskill Douglas.
And the 3.1% and as you approach for contain me skill and economy segments, respectively.
We are glad that the new brands under the existing portfolio of the age will strengthen our position in the luxury an upscale segment.
Certainly this deal help walk through TCEP establish a geographic footprint in Europe , Middle East and Africa.
As shown on page 18.
The geographic coverage of the two companies.
I have no overlap so.
It's going to be a meaningful step to establish a global hotel network.
A global network has a natural synergy optimally customized to the us Emilia brands and achieving advantage in attracting customers all over the world.
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Oh, Hi, Paul wouldn't be just shared the synergies that will be generated after this acquisition will also include the following as shown on page 19.
First off for the D H brands will have.
[laughter] Ics accelerated expansion by leverage barges current strong presence in China.
And secondly taught you will successfully establish our usual footprint into Europe Middle East in Africa.
Thirdly, we envision plot juice loyalty program and all the dark sales capability will help the age to strengthen their competitiveness in their existing markets.
And also help the operation off their current themselves.
Finally.
Just a leading technology will help improve block a D H operation.
Even further.
We expect improvement in the back office operations efficiency and the customer interfaces going forward.
For those investors on todays call, who have not yet experienced any off the wonderful huge hotels, we would like to quickly repute through some of the pictures of the new Brent.
We're going to join part to some leading a couple of months.
[noise], so on slide 20 and 21.
I want to keep your quick flash launched Eichenberger hotels and resorts.
On the which brands we have 60 hotels housing historic traditional beauty as well as likely city residences.
We also offer health and beauty Olson said at the very hard nature.
[noise] on slide 22.
The Intercity hotel brand offers more than 40 upper mid range urban hotels, all which are located within easy walking distance of Ruiz stations airport or other public transportation hotspot.
Slide 23 highlights the Max flashed Eisenberger, Brian .
New and occurring Magic concept, which places the focus on essentials.
Holden's with multiple maximize mistake.
On slide 24, judging the city, Randy hotel reflect metropolitan lifestyle, and the draw upon the local music and culture. It seems.
Last but not the least on slide 25.
Leap hotel is a well positioned well know Brent you, Scandinavia, which offer service and design, that's a great rates for the many.
With that.
Kinda call Overkill.
You will walk you through old Q3, operational and financial result in more detail to you.
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Hello, everyone.
Oh.
Yeah. We're excited to report our took quanta result, with double digit growth in our number of rooms net revenues and EBITDA.
As shown on slide 27.
At the end of true treat this year.
We had to pull told level, all 504000 rooms and increase all 23% from the end of Q3 218.
Total turnover at the hotel lever reach 9.9 billion, an increase of 19% from a year ago.
Our net revenues increased by 10% from 2.8 billion to 3.1 billion in Chile treat tool at night.
I'll just the EBITDA stood at 0.9 billion for Q3, two one night as compared to 1 billion ended the quarter last year.
However, the pro forma adjusted EBITDA would have been 1.1 billion, although the 6.2% off net revenue in Q3.
Two one night Eve as Cody the impact of our significant investment in development teams.
Skill brand withheld I'd capabilities and foreign exchange losses related to our investment in a call shacks.
Oh investment in development teams have started to be reflected in our increasing pipeline hotels was our investment in Ikea had begun to reward.
By the increasing share all like central reservations, and online payments, which will help to drive our sustaining future growth.
Please now turn to slide 28.
In Q3, our blended revpar dropped by 0.8%.
The 80, all grew by 2.6% contributed by an increasing mix often make me an upscale and upgrade the hotels with higher.
However, the highest video was offset by a treat percentage point decrease in occupancy.
Hello.
Occupancy was largely attributable to solve the macro economic environment.
Turning to slide 29.
Our same hotel Revpar declined by 3.8% in the June treat.
Oh, eight YOD dropped by 1.1% and our occupancy decreased by 2.5 percentage points year over year, mainly attributable to selfless macroeconomic conditions.
Revpar growth trend into fall Q1, nine has remained relatively weak and.
Still slow business travel demand.
Despite a three percentage point decrease in the same hotel occupancy.
Our material talc and GCC remains high at 90%.
These occupancy level do you outperformed the industry average by 20 percentage points.
In this collection.
We continue to see more real opportunities tool for the consolidation in the Chinese lodging industry.
Moving onto financial results on slide 30.
Our net revenues grew by 10.4% in to treat inline with our guidance all nine to 11 defense.
As we looked at revenue component.
Revenues from our lease and operated hotels increased by two percentage you will you and net revenues from our many tried and French upheld.
34% compared to last year.
In Q3 revenue that was contributed by how at sunlight Manachised and franchised business model contributed 30.7% all parameters.
By 5.4 percentage points from last year.
We expect the contribution from our franchise segment will continue to increase going forward.
We have consistently made good progress in our mid scale motel salmon.
As shown on slide so if you want.
In Q3 revenue from me and upscale hotels increased by 3% to 1.7 billion.
How things will be sold the fed off the total hotel revenues.
For all 51%.
Go.
Let's now turn to slide 32, and look at operating income in margin.
The reported income and from operation was 703 million compared to 775 million last year.
The reported operating margin was 23% five percentage point lower compared to two or one eight.
You know operating profit and margin was mainly due to our investment in hotel development teams upscale hotels and I kept their abilities.
Excluding these investments the pro forma income from operations would have been 803 million.
Back to 775 million last year.
The pro forma opened the margin would have been 26.3% come back to doing it but that in Q3 last year.
As we updated our last quarterly earning call, we're increasing headcount of our development teams.
The results has been positive.
We have seen on opened hotels increased by 88% to 1756 at the end of Q3 as compared to 900 ended at fall at the end of Q treat last year.
The fossil hotel network expansion.
Bring in revenue and operating properties when they are open.
But not an area, where we invest that you know I keep talent pool.
As journey explain in her presentation earlier.
Our technology capabilities allow us to drive for operational efficiencies and better customer experience.
Janey also mentioned earlier, we have recorded a higher share of advanced online central reservations and online payments.
These changes benefits our financial performance.
Our technology team is also looking on a good number of other project, which we will incorporate into all the hotel operations, we will shed any developments with you at the length of time.
It's also mentioned by Janney earlier, we made a strategic deployment.
To the upscale hotel segment by expanding our team and securing a number of strategically located properties in Shanghai, Beijing hung go and tend to fall Oh upscale brands.
Has caused our payroll costs and pre opening expenses to increase as compared to last year.
We will start to see benefit from the first off this upscale hotel as we start operations and generate revenue from the end of two one night forward.
We believe all these investment.
Well bring additional revenue and drive margin expansion in the coming periods.
In this quarter, we also recorded a lower on the operating income as compared to what eight.
Is it mainly due to a company they shouldn't be see from lateral on termination of the little these hotels totaling 40 million you treat <unk> eight.
Moving on to the kind of real thesis on slide 30 treat.
In Q3, two one night, we recorded a net cash from operations of 1 billion.
After deducting the Capex for men tenants and you would elements of 319 million the free cash flow generated in Q3 was 617 million.
We generated approximately 573 million from the sale. So our investments we use this process to do we pay approximately 600 of 5 million offshore syndication loan.
At the end of Q tree, all cash and cash equivalent and restricted cash balance was approximately 4.5 billion.
Please refer to slice of the full on how we plan to fund our launch.
<unk> acquisition.
These will be an all cash transaction.
We will use a new syndication bank borrowings of 440 million euros, and the balance using our own cash.
The bank borrowings will be in euros bear an interest of 2.3% before tax.
Of course transactions, our net debt EBITDA multiple will reached 2.89 times.
It is well within the four times limits of our borrowing covenant.
However, we plan to use the cash generated from our operation as well as cash from I'll be sports off investment to paid out these bank borrowings in the coming years.
This would help us to reduce our net debt EBITDA multiple below 2.5 times.
Finally on slide five our guidance.
We will maintain our full year revenue guidance of 10% to 12%.
In 2020 , we expect to open approximately.
1700 hotels. This one thought it was 100. This 1700 numbers represent an associate hotel opening pocket as compared to two overnight.
With that let's go to.
Acuity.
[noise], ladies and gentlemen, who now begin the question and answer session. If you wish to ask a question. Please press star one on your telephone and wait you need to be announced if you wish you can't do your question at any time. Please press the pound O. hatch Kate.
Your first question today comes from the line of Chad how from T.H. capital. Please go ahead.
Ah money management since I have two questions.
Well.
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What are they tend to put the money.
You bet Nishan youre going to face. That's my question. Thank you.
Okay.
Oh, Hi, Oh, I think I'll answer the second question and how many.
Vsan over hotels open next year.
And then I'll leave.
Two questions.
So a tremendous cheap.
Next you yet the plant opened approximately 1700 hotels of which 25 of which is leasing operated and directly say some manachised hotels.
Mhm.
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Hi, I I would translate the answer stuff needs to GE to your first question.
In other to reach a 10000 hotels in the next three to five years going down to their lower tier city, it's inevitable and it's that we must to go go Dom first or the the top management team and also the key members of development team has done three times grass roots.
So they in the three CD three.
In the three trip in the northwest impart central part and East part of China and the feedback is very positive. We are confident that our flagship brands like how do tend to Ji hotel and also some soft brand hotels will have very positive return.
Oh.
All of the soft brand hotels would have thought very positive.
Return in this low tier cities, because first up or lack of so good quality products in those cities. So the.
Second is that the rental costs is very low in this city. So we could provide really good product with more spacious area in the cities and we believe the upper mid scale and upscale brands like a crist orange like jory on and the others will follow.
So the later staff of the Ji hotel and a higher Ti after this to Brad 40 established in those areas.
Oh.
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Oh. So there are two folds of I'll answer to your questions of course, so for a hotel that you have very labor intensive work and a as we keep that larger and larger there's oh, we were going to manage like more than 10.
Oh, sorry, 100000, even 200000 people. So therefore, we're going to improve our technology and redo the reliance of the people by providing more cloud based for example, P.M.S. AI technology and other et cetera. It it's not.
Only just the reduced reliance people. He also important to improve the efficiency.
Work help them to make a better and savvy position based on the daily work. That's one vote. The other voted that is actually hotel that human business, you know talking about to clients a bit and it's it's very important that we give a naphtha.
[noise] care carrying and the return back to our associates and the creates a very good working played for our input needs. So therefore, we're gonna Jenson our [noise].
[laughter] development in coaching and a career development and the also all the.
Reading sorry, the audio the kind of up facilities to provide a better workplace for example, the DAMI treat and also the uniform and all kinds of related service to our people.
Thank you thank him for them.
Your next question comes from the bond of Ken Chung from Jefferies. Please go ahead.
Hi management on congratulation on video sharing respond to questions I suppose it's only be I'm hotel, putting guidance well I'm actually I'm just wanted to get a sense well. So the auto close to her next year and also on movies do you ever sizable amount. So springs next year and I'm, hoping they'll spend can be honest.
These are muscle friends and is there any margin difference from our.
Oh portfolio on the second question is regarding D. A quick question authority.
Well I understand what sounds like the lease and operate model and they have a meaningfully lower EBITDA margin does our group well I'm just wondering how does impact our margin next year when we consolidate and also when they have some 46 hotels under the pipeline how would that impact our.
Spends open you're pretty much.
Okay I can I.
So the question of your first question is on the Oh God that on the gross Oh, we expect that the a the close of the closure will be approximately the same amount a number the number of upheld.
In this year I can you be in a range of approximately like 200.
In them, while no to eat that all the 1700 hotels that though the opening approximately like a 500 [laughter] the soft brands.
Yeah. Good Britain is actually lower and because that does yeah, you seem to be developing and beating the scale of the two study just kind of stop rental tell so have you don't I expect that youre done that probably contribution from these hotel will be significant in the coming year on year on few that we'd be wasn't skilled oh I see that he he.
The next few years W. set of steel a a more meaningful probably contribution from the software lapels.
Regarding your second question baseball bought hospitality.
Approximately like I wouldn't want to 60, but 60 treats.
63 days, if you do Purcell, which I agree.
Leap hotel, so I would say that going forward he said, yes.
Oh, well why don't you opening guidance of one thousands of another 100 hotel.
Includes the pot lines of social stability, yet so we would need to agree off the closure then we would actually CB how from D. you incorporate a number in the next year's guidance.
And the second questions about the Bush hospitality margin you that yes.
Georgia facility have lower EBITDA margin a basketball.
Having said that what we had been east that you'd be up that incorporate the numbers is that a NV, our our EBITDA margin a wouldn't if I read reviews, but having said that you'd be so you're talking about an increasing EBITDA Debbie I don't know and and I would say that you will get you from a separate perspective, because we think that you thought they needed the potential and seamless.
As mentioned by Jennie O earlier, we will bring into the branding to China for fiber expansion in China and also that though he would actually Oh ex post some of our technical capabilities and loyalty programs to help them or to improved operating efficiencies you get home base.
Okay. Thank you very much.
[noise] [noise]. Your next question comes from Milan, Justin Kwok Goldman Sachs. Please go ahead.
Hi, good morning, Thanks for taking my question.
Perhaps I got to question for Mr. T cells, one it's about a very exciting to see you spent more time and the funding on the company Oh, what would be the strategic focus so you wouldn't becoming one due to use what exactly do want to achieve a if you take on more management duties on on a day to day basis and the second.
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I'm also very interesting to see you are getting more friends on the upscale side with the idea acquisition from the overall brand portfolio point of view are you now quite happy with what you're having which is already a over 20 brands or do you think that in the next one to two years you are still on the acquisition for more.
Brent is a focus or are you actually more looking at the M&A angle for you to expand into overseas in just two questions.
And then.
Another question, probably more near term as you get out a bit more guidance in 2020 on your.
<unk> opening what would be the sad news on the Revpar side on the same hotel basis.
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Things as well as the pulling off yes, I know you asked the kind of pit wall, but having said that you know it's I mean, you mentioned in the earlier conference call. There's always a [laughter] FIFA between you know the response from the U.S. or where you know recently a the Trump administration has also heightened up some of the complex again. So it gives me have negative impact on.
On on the on on the Chinese.
Our economy, but having said that you expect that the the red Hot trend going forward to be approximately maybe flat I want to either flat or maybe you eat maybe move down slightly down to the selinexor kind of territory in the coming 12 months.
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Okay.
So.
So as we all know there are a lot of certainty rising in the past one year no matter. The you know the U.S. China relationship a also love change and domestic U.S. and also what's happening in Hong Kong a recently, that's one so that they should.
National.
Joe politics or environment and the second is the you know in a business segment of Ah travel industry be eightys very active as wise OTN and also there's an emergent entrance called Oh, you. So there's a lot of things are happening and.
So that's our that's a created uncertainty of our business environment.
Facing this situation, while I didn't spend enough time previously in the past the a years you know a at the front line, but we realized considering all the I external factors. It. It's important for me to take the T O ROE and enhance our management capacity.
At the top level together with Janney and and meantime, we will also bring more young and Ah Ah law you brought on by June onto a creates the environment and opportunity for them to contribute to the next the development of our company as well.
[noise] and coming back to a your question first of all four of the focus off the next two years Oh, We think you know right now is a kind of a downturn overall the macro wise, it's a challenging X turnover.
Argument, but usually winter if the good time for the strong players we think our capabilities in lot of T program management capability as wise to I.T. system will help us to enable more and more into beat you hotel.
Help us to connect them Buda more cheney effect in this industry.
So oh, we think that we could we could help the entire industry to go through this cycle Betta Anda creates a more resilient industry and also a we have a lot of a employees like to 200 300000 employees, who you know.
Who are lead but very average life and the who didn't have to trend to go to the college and we feel very strong responsibility to all the employees as well as our franchisees. So we would like to you know a share the responsibility and tasked with them together.
And talking about the acquisition of D. H, a fair so far what would I I would like to emphasize that China will do the focus of our growth because the development potential as well the speed of China, Unprecedent I compared to other geography in the world.
And I'm talking about D H.
They are met the management team is very professional and the stabilized taking that CEO . Tom Aquarium. For example is three generation, it's a hoteliers and he feels very strong you know a proprietary asked about loyalty to this company.
Our acquisition, so our view of personal coin that Ah Ah that upscale brand as well as luxury brand has a big potential of growth in China and.
We would like to you know by does that.
International brand, because we all observed that the international brand.
You know usually is the advantage compared to local brand in the Upskill settlements. That's why we would like to you know bring more international brand into China, Inc. complementing our local brands in the upscale segment as you are referring back to my charge also for wave a this out.
A quick vishay is actually laid the groundwork for our preparing mission of enter into that upscale segment.
Second is this out this acquisition side, we think is a reasonable side not too big not too small a we would like to be patient and take step by step approach to develop the overseas gross profit.
[noise]. Your final question today comes from the line Lena Young from HSBC. Please go ahead.
Hi, Thank you. Thank you management for taking my question like Guy there might be agree with a chairman's comments that you have to continue say Eli seemed like a new business drivers for the business. So I still have a question regarding the DHX medias I'm glad to see a share has a enjoy.
Premium valuation by says Oh, you appear a hotel operators in China, because investors like asset light model and also you have been focus on the limit to the service for a format. When after you like acquired P. H, how can you make sure it like a DHR that is not I tried to return on the basket.
Capital [laughter] basically when you talk about apply to bring their upscale brands into China, I'm wondering what kind of position me I think cap out are they going to be like at the full service hotels are normally for luxury brands or it's kind of like <unk>. It will be asking but our type had to go yeah I do not like a limited a survey.
Version in China. Thank you very much.
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Segments.
For example, there's a the world Economic Forum, there's eating conference value. It's in their striking Burger hotel in Davos, There's another brand part intercity, it's a four star hotel as well it time it has the relationship with the Dortch railway.
And Oh positioning for this to Brian a is that the following their stride number there will be a standard five star hotel.
Okay, that's for management contract and it won't be a first the full service hotel rather than limited service and typical kind will be government and a real as they did at sorry real real asset developer.
And interest city, it's more like a forced to hotel and for business Okasan and it can be foodservice and sometimes limited service. It Brenda will probably won't give out faster than the foodservice died in Burger and the in general we thing could the China development updates to Brent.
We'll be Saudi quick and we anticipate the growth will that sorry, the sites will exceed Germany, you know in a midterm hobby.
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[noise] [laughter], okay operator.
Thank you, ladies and gentlemen studies all the time you have to questions. Today. Today's conference call has now concluded. Thank you participating you may now disconnect.