Q2 2021 Huazhu Group Ltd Earnings Call

August 25, 2021

[music].

Okay.

And thank you for is studying by will come to the <unk> Group Limited Q2 2021 earnings conference call. At this time, all participants are in listen only mode.

After the Speakers' presentation, there will be a question and answer session.

To ask a question during the session you will need.

Good day Star one on your chart, though please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would like to turn the crank crest over it's your first speaker today, Jason. These go ahead.

Thank you Karina.

And good evening everyone.

So thanks for joining us today welcome to the <unk> group's 2021 second quarter and interim earnings conference call. Joining us today is our founder and CEO, Mr. Chi Chi our President Mr Gene Lee, our Chief Digital Officer, Mr Dosing King our CFO.

Everyone gets to play our.

Our deputy CFO, Mr and.

In the midst of legal.

Following their prepared remarks management will be available to answer your questions. Before we continue. Please note that the discussion today will include forward looking statements made under the safe Harbor provision of.

The United States Private Securities Litigation Reform Act of 1995.

Forward looking statements involve inherent risks and uncertainties.

As such our results may be materially different from the views expressed today.

Number of potential risks.

These are outside the our public.

<unk> filings with the SEC.

<unk> group does not undertake any obligations to update any forward looking statements, except as required by applicable laws.

On our call today, we will also mention adjusted financial measures during the discussion of our performance reconciliation of GAAP.

Measures to comparable GAAP information can be found in our earnings release that was distributed yesterday.

As a reminder, this conference call is being recorded.

Webcast of this conference call as well as supplementary slide presentation is available on our part to group's website at IR <unk>.

<unk> dot com with that now I will turn the call over to Mr. <unk> Mr. <unk>. Please.

Good evening, everyone. Thank you for joining us today.

I would like to give you an overview of our business.

In the second quarter.

Our China real hard you covered it to 102% over the same period of 2019.

Supported by a strong leisure traveling you've made.

Obviously, it's up by a relatively weak heart recovery in June due to COVID-19.

Surgeons in Guangdong province, and the traffic control in Beijing.

However.

Fortunately that delta.

Our into our COVID-19 was again detected in Nanjing since late July.

We in the future.

We are in the freezer.

Creating into many other programs and the Delta variant.

Per month.

Promote here that the Chinese government posted another run our subject to traveling restrictions, which seriously affected our performance August.

Our European business.

These thoughts on productivity chain.

As a rule of hardware covering too.

50% to 60% our 2019 level during the summer holiday season.

This is mainly due to the continued progress.

As a nation and the restriction.

Is.

However.

We remain cautious on the future recovery of the European governments.

Especially the German government are still carefully monitoring the situation.

Regarding the Delta of a variant and a potential impact for.

Right.

Looking.

However, our 13 are certainties.

By this pandemic may exist.

Excess.

Longer than expected expected a ton.

<unk> to be well prepared to overcome any business.

<unk>.

Ahead of time.

Nevertheless.

Long term.

Have a higher confidence in China's future economic growth.

And I think.

The upward trend of the China lodging industry remained intact.

Therefore, we will be in.

<unk> maintained our strategies such as further penetrating over low tier cities.

Beating up of upper Midscale and upscale segment.

Although nowadays listen the upgrades and talent.

<unk>.

Concentrating on higher quality.

Quality hotel expansion to support our sustainable growth.

With that our turn the call to accumulate update our return to business development.

Mark <unk> here.

And.

<unk> has which as you can see the gene that we're pushing.

<unk> Gary.

So articular split.

Clear.

Uh huh.

We are in Georgia, and <unk> in Europe, and Japan sounds interesting.

Thank you Gigi as usual I will discuss our recent business recovery trends in details. Please.

Please turn to page two.

For the second quarter, our Revpar recovery ratios upward trends with Revpar in April and May recover to 100% and 106% respectively.

Hello tissue shipments will soar.

More condo each incur between Oakland.

During the Revpar suitable.

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However, as mentioned ITT earlier due to the COVID-19 research honesty in Guangdong and traffic controlling Beijing since late May.

Our revpar recovery in Joe.

<unk> slowed down chip.

If we excluded the impact from the control and the Beijing, our Revpar recovery for the remaining areas was our tracking tools.

Sure.

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It's worth us buyers tons ounces, we should of launching several new oncology through the income.

<unk> had revpar.

Our income.

Revenue.

Unfortunately things late July a new way for Delta of Rins on Covid.

19 was detected again in Nanjing and spreading into many other cities in China.

That the government imposed another round of strict traveling restriction, which negatively affected travelling demand.

Significantly affected our business as August and what's normally a peak.

<unk> for traveling therefore due to the impacts from the Delta environment as the historical high base.

August 23rd our Revpar only recovered to 46% of 2019 level.

So seamless.

Schindler leasing et cetera, water infotainment about concept.

The dilution of <unk> <unk>.

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We saw the residence way profit out of Iran has been largely content.

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Our provision measure posted by the government the newly confirmed case declined significantly from the peak.

So I definitely got the thing you said, you'll yeah product Hermes genius somebody is continuing to begin the <unk>.

Hi, Judy so the shingle Thunder chew bags in Europe.

So our <unk>, Alabama.

Please turn to page three.

The hotel development we.

Achieved.

Simplifying the number of new signings at $1.502 for the first half of this year increased by nearly 50% year over year.

While managed our vessels under charter.

Josh will tweaking.

Sure sure.

Changing are conducted within Covid cancel.

Rich this time can total revenues.

At the same time, our lower tier city penetration is further accelerating.

Lower tier cities proportion accounted over 50% for both our current hotel pipeline and the new signings.

So on one hand planned out in terms of free cash.

Yes, so this whole in Chengdu.

The judge Union <unk> on the downside.

Moreover, we have already penetrated into over 1000 cities as of June, including both hotels in operation and the pipeline added 200 cities compared to the same period of last year.

As she also.

Sure Doug.

Good genes from Sheila Joey younger Swooshing quite cold for launching <unk> into <unk> to change it.

<unk> total Asia.

However, please note that given the travel restriction.

Due to the depth of our rents of COVID-19.

We mentioned above our recent new signings in the construction progress were also negatively affected.

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Element one quarter.

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While minsheng Taiyuan looking at its annual awards you can do the soft products you put <unk> nitrogen zone, some goddamn thing where they can.

Our bulk water Jesus regime synergy.

$19 million.

No.

Please turn to page four for our upper Middle Hotel segment.

We will use multi brand strategy to further exploring the market opportunities our up middle.

<unk> Hotel brand portfolio includes Crystal Orange Intercity procure munching Madison and the Novotel gives the earnings are in the new year, so more than <unk> the bad news.

GAAP pipeline the slowdown on the way down by about GAAP, usually the early north annual momentum more than Europe.

Joe did slowdown happened honestly on desktop which is yet.

As of June 2021, we have a total of 404 upper middle hotels in operation and a 248 in the pipeline.

We're targeting to achieve over 1000 upper middle of hotels in operation and pipeline.

Slide by the end of 2023.

Cheers, Raul mentioned <unk> and <unk>.

<unk> per diluted changing through banking side, so on the vehicles.

<unk> two <unk>.

On the <unk> of July we announced that.

We announced a license agreement for <unk> Diamond Burger and of course design group to establish a joined hotel brand. This is another breakthrough into the upscale and luxury hotel segment globally. Please turn to page five while.

<unk>.

Our C&I a change of heart.

Obviously the <unk>.

This is up <unk> <unk> year to date.

We are planning to open at least eight hotels in next 10 years.

Those hotels will be all located in prime area of international Metro policies Europe.

Sure Joe.

They are designed to assist with embedded <unk>.

So below or above that hurdle lingo or thought about <unk> I think <unk>.

We will then dive, although youre going about <unk>.

Similar to other international Hotel brand cooperation with luxury brands, our cooperation with Porsche design brands will further enhance our.

Our stocking versus brand positioning and awareness globally.

Help us to catch more opportunities in the upscale and luxury segments in the future.

Sure Scott.

On the <unk>.

The FY zero locally in placebo these incentives through the previous Indu <unk> dji.

So again, there's some currently.

Regarding the kind of element that businesses over there and so we are exiting the JV.

In the other revenue.

Chief Mortgaging College entrance.

<unk> Lindeman.

Now please turn to page six along with our lower tier cities penetration.

Our membership program synergies to lower tier cities and affinity App traffic generation two hotels are the most of the concerns that you may have.

We are very happy to see that our Crs contribution in lower tier cities achieved $2, 56% very close to the higher tier cities.

And it demonstrated our ability to further penetrate into lower tier markets.

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So the only time they also Jan can still part of those immediate.

<unk> NAND wafers Zelman <unk> Zhengzhou.

So to the trends.

Our Guangzhou Shenzhen.

So angie.

Okay.

We constantly are please turn to page seven we constantly emphasize on the data security matters.

And it is the bottom line and the highest priority for our tool.

First of all we have established that information to create these committees and set up the information.

So as to create these tender.

She said the woman, that's what Eugene Tayo <unk> levels for months.

<unk> EMEA Comptroller issued year, which equally the insurance boot.

<unk> unusual and yet although smaller ISO achieving.

So the <unk> that you think you've had.

Linear other controller, ISO or cheat sheet in Europe.

Although some of his homework other than the <unk>.

Our hydropower quarter Peter.

<unk>.

So the <unk> buildup.

Secondly, our data are all safe to local needs.

Lastly, we had received a virus certificate almost day, that's a crazy.

As shown in our slide in year of 2019, <unk> became the first the Mystic Hotel group, which received ISO two seven or one certificate and in 2020.

And it will become one of the global hotel groups, which received ISO 277 or $1 certificate.

Additionally, our tool has also up 10% at the PCI DSS payment card industry.

Data is accretive standouts certificate.

So in that revenue.

Final vote.

How much you don't know about supermarket channel.

<unk>, Sean Hogan, Judy Garland, our CFO Jim <unk>.

Changeovers of <unk> Uno throughout Europe.

While <unk> is down three two by the chiefs of DHT.

$8 million progressed through the distributor.

Please turn to page eight.

We are part Deutsche hospitality.

We launched 500 days digitalization plan for it.

And so second quarter, all functions and the systems setup is completed and they are ready to use.

We are now in the stage of massive rollout was targeting two hour to 70% of DH hotels by the end of this year and 100% completion next year.

It was a year ago with J&J hardware already boutique hotel with the solution.

With that I will.

Ill turn the call to Esa.

Our second quarter operational and financial performance.

Thank you Julie.

Good morning, and good evening to everyone on whenever you are let's move on to our operational and financial review second quarter of 2021 as shown on slide 10, Our hotel network expansion.

Despite 15% second quarter to 692 key films compared to.

The second quarter of last.

Last year of.

590 <unk>.

Leading DH legacy Viking Hotel network expanded by 16% year on year to roughly.

<unk> hundred 68 cables in the second quarter.

For our hotel turnover in the second quarter.

You don't turnover grew by 98% year on year to RMB 13 billion in the second quarter. It was mainly due to our continued network expansion in China and.

And then the initial recovery of Deutsche Hospitality operation as well as the low base for both China and the European business last year.

Excluding BH legacy <unk> hotel net turnover grew 95% a year on year to RMB $12.7 billion in the second quarter.

And the recorded and 45% pitch increase if compared with the second quarter 2019. The growth is mainly driven by the hotel network expansion under the asset light model.

Turn to page 11 legacy <unk> blended revpar for the.

Second quarter grew 2% from 2019 to RMB 210.

The ADR in the second quarter grew by 8% to RMB 255, compared to 2019, while the occupancy in the second quarter is <unk> five percentage lower compared to 2019.

It was mainly caused by the COVID-19 situation, especially the resurgence in Guangdong <unk> and also the traffic control in Beijing in June.

Turning to page 12, our legacy DH business.

So initial recovery in the second quarter since German government.

A lockdown from last November.

Two the continued progress of vaccination and the restrictions ease our legacy DH blended revpar for the second quarter grew 26 percentage to 20 euro compared to the second quarter of 2020.

Yes.

The occupancy improved by six percentage points compared to the last second.

Second quarter last year, while the ADR dropped by 6% to euro $82.

Yeah.

Please see our financial results on slide 13.

Total net revenue.

84% year on year to RMB, three 6 billion in second quarter 2021, excluding DH legacy module recorded an 85 percentage year on year growth rate to RMB three 4 billion.

The revenue was slightly below our previous.

It was mainly due to the COVID-19, resurgence in Guangdong province, and traffic controlling Beijing as mentioned before.

Excluding the impact.

From the above mentioned areas the revenue growth was actually in line with our previous guidance.

Breaking.

[laughter] guide on the revenue of the second quarter leased and owned the revenue increased by 85% year on year to RMB, two 3 billion.

Excluding the age the bees and own the revenue of legacy Quadro grew by 84% year over year to RMB, two 1 billion.

Net revenue from managed drive in French.

<unk> sales grew by 89% to RMB one.

Million, mainly driven by the 89% year on year growth of legacy quadrant.

Due to the further expanding hotel networks with S. A life model monetize and franchise revenue contribution in large to 36 percentage and.

<unk> for the quarter compared to compare with the 35 percentage in the second quarter 2020 at the group level.

But like I say cloud tool. The <unk> franchise model also expanded to 38 percentage in the second quarter of 2021 compared to compared with 37 percentage.

A year ago.

Now, let's move on to the cost and profitability section on slide 14.

Second quarter 2021, the reported operating income turned positive to RMB $629 million compared to a loss of RMB 400.

$94 million last year, and a loss of RMB 575, a quarter ago.

Mainly due to the business recovery in both China and Europe.

Excluding DH selective bottomless operation income in the second quarter of 2021 was RMB 763.

Million compared to a loss of RMB 207 million last year, and a loss of RMB 172 million a quarter ago.

[noise].

The hotel operating cost and other operating costs for the second quarter of 2021 was RMB two 8 billion.

Increased by 28% year on year decline.

This was mainly driven by the legacy <unk>, which recorded RMB, two 2 billion call hotel operating costs integrating 829% year over year growth.

The increase was mainly attributable to the higher rental cost.

The new upscale hotel Hyatt hotel level personnel costs, as we expand growing our hotel networks.

Rapidly and the higher DNA.

<unk> and amortization cost, which were related to the upscale hotel openings and upgrading of existing hotel.

As we mentioned in the previous quarter, all future expansion of our upscale hotel well they use S N life model.

Therefore on a pre op pre opening costs declined by 84% year over year and 20% Q on Q2, only RMB 16 million in the second quarter.

From 'twenty one.

Our SG&A in the second quarter of 2021 increased by 49% year over year to RMB 553 million, mainly driven by the increase of legacy <unk>.

Excluding the age the SG&A for <unk> increased by seven.

Of 12, 1% a year over year to RMB $423 million.

The increase was mainly attributable to the increase of selling and marketing expenses due to the revenue recovery the increase of head count for our BD teams to support penetration into lower tier cities the increase of personal cost for upscale.

17th that unit and the increase of the it investments as well.

Other operating income in the second quarter of 2021 increased by 121 percentage to RMB 362 million.

Mainly due to the 38 million euros substitute.

<unk> received from the German German government. This is related to the 2020 lockdown period.

Turning to page 15, our adjusted EBITDA income turned positive to RMB 1 billion compared to a loss of RMB $97 million a year.

Subsidy the age of the EBITDA loss in the second quarter was RMB $73 million narrowed from RMB $235 million last year, mainly due to the government subsidy.

Excluding the age let's see what you recorded adjusted EBITDA income of 131.

1 billion RMB.

ROE by 700 over 9%.

Quarter of 2020.

In the second quarter of 2021, we reported adjusted net income of RMB $464 million compared to a loss of RMB 476, a year ago.

Excluding the age legacy quadrant recorded an adjusted net income of RMB 517, 9 million compared with RMB 253 million loss in the second quarter of 2020.

The non-GAAP the non-GAAP pro forma adjustments mentioned.

Page.

Who did a realized gain or losses from fair value change of equity is related to some of our investments.

Coming to the cash position, we further lowered our net debt of.

On the $4.4 billion by the end of second quarter compared with RMB five.

$2 billion by the end of the first quarter and there is no risk of breaching the financial covenants of the covenants of the U S. Dollar 1 billion syndication loan our cash balance was RMB, six 2 billion and utilized bank facilities.

RMB six 8 billion this cash in.

Facilities.

Now us to further pay down bank debt in 2021, and also 2022 C. B and also will be used to weather any.

Foreseen circumstances.

Coming to DHS update on page 18.

The recovery is coming to the right direction, although the passive bumpy.

Vaccination commenced the same December 2020 has been speeding up in the second quarter of 2021 restriction will especially towards people who have recovered from COVID-19 infection and people with either complete injection.

<unk> four negative test results.

August 23rd about 64% of German population has received at least one short and 59% of the whole population were fully vaccinated.

Occupancy is right to continuously from about 19% in Q1.

24% in Q2, and now it's about 50% in the AGA summertime.

The recovery ratio compared to 2019 is about 54% in July and a 67% in August month to date.

Meantime, DHS.

In further actions to reduce costs and preserve cash including negotiating for lease waivers streamline overhead at both hotel and headquarter level.

The impact of the extension of the Lockdown would be also partially offset by the short term worker allowance and also the special government.

It's taken of which 38 million euros subsidy has been successfully received and recorded in Q2 relating to the 2020 lockdown.

Companies do you're working towards more government subsidy, which would be related to the 2021 lockdown.

The company's cash position is.

Substations and do you have another 12 million Euro credit line available.

Yeah.

Turning to page 19 on guidance.

Considering the impacts of COVID-19, resurgence in Guangdong and traffic control of in Beijing seems late to me.

The impact of Delta.

The fishermen bridie from 19 through several systems in China recently.

We lowered our Q3 and full year revenue guidance.

For the third quarter of 2021.

We expect net revenue to be in the range of 8% to 12% compared to the third quarter of 2020.

<unk> been in for two 8% excluding GH.

To provide a more meaningful guidance, excluding the impact of COVID-19, what can we expect that revenue growth will be in the range of 12% to 16% compared to pre COVID-19 results in the third quarter of 2019, and a net revenue reduction.

We'll be in the range of 3% to 7% is excluding DH.

For the full year of 2021, we now expect the net revenue growth in the range of.

A 29% to 33% or two the range from 34% to 38% excluding ph.

Rich will provide a more meaningful guidance, excluding the impact of COVID-19, but we expect the net revenue growth will be in the range of 17% to 21% compared with pre COVID-19 results of 2029 or to the range from 2% to 6% is.

Excluding DH.

[noise].

Please note that our current revenue guidance is based on the expenses.

The reasoned Delta variant of COVID-19, resurgence can be well has changed.

By the beginning of September however, given the future situations cannot make us do uncertain and unpredictable when they need to adjust our guidance accordingly.

We also keep the gross opening target of 1600, 1800 hotels unchanged, but the signing speed of the new pipelines and the construction of the new hotels in the next few months will be affected as well.

With that let's open up for Q&A.

Okay.

As a reminder to ask a question you will need to press star one on your telephone to win.

They're all your question crashed cashed.

Please standby, while we compile the Q&A roster.

Yeah.

[noise].

Okay.

Yeah.

Your first question comes from the line of Ken Ho from Th capital.

Please ask your question.

Yeah, Good morning management I have.

Two questions.

Would you please give us some color on the member.

Yeah.

Saturation Hall.

So.

Should you how many months.

Remember, we only adage and what is your channel four member acquisition. So that is number one question number two in Europe.

Q3 guidance and yeah.

Do you see until so your guidance what do you see in.

China in terms of.

Traveling hotel.

You know demands as well as the Covid.

And it seems like you know the COVID-19 here and there or with pop up.

So I just wonder how you like in <unk>.

This guidance.

How much do you already see.

Your guidance you know, what's the base for your Q3 guidance domestic guidance. Thank you.

Yeah.

[noise].

[noise] [noise] yeah. It was sure why to the CDO Lusinchi Iga ensures you don't quite I think around two.

Hum.

Okay, and then let me cause a stage to the English.

I think that kind of answer the last question I wanted to.

With me sitting waiting for the second question.

In Q2.

On the membership because it's come up a the number was $6 million increased okay.

Anyway, I think that we continue the best practice.

Practice to develop a new member.

Develop a member recruitment as such has got something like that.

The hotel based flung the.

Oh, so attaching point.

Adjusted to be shipped.

To be trusted by the to the member and are hard to make sure that Oh, how to make sure that something like the the the frequency okay, but I mean, I think that from the second away. This is sop, we encourage our team.

And get a true development not the b to B and B to C. Pflum their local sales team and our corporate itself teeth and number three this is our most important but something that we say you know we shouldn't this is a well we do a lot of our partnership with a b to b.

C, albeit would be to be such as just the IP and the wechat and you wouldn't like D. D. A.

We do this kind of a partnership with the money a useful way to do the extra no I mean, the touches either a membership of recruitment.

So that's where my question number one thank you.

[noise], Oh, gosh, Oh, it's Trish.

Tricia.

So to.

I'll tell you the shoulder shoulder.

Ooh with other gene you too.

So you could say well talk a little bit.

Got it.

Mucci and G suite.

G SEC.

The itching creep adult swim to the JV shots.

Switching to finish well maybe two it's our opinion.

Essentially two parts to this.

Two we kept them choose.

Excuse me.

Yeah.

You said you do couldn't separate when she was thought you shoot the beautiful Council.

So you chose a G SIB breaching bargoon.

Arguable Thoughtfully championship.

Yeah.

Four over Q3 revenue card games, Oh, we have.

Houston's I made that the Chinese governments, how do you post a very strict travel restrictions and a prohibition control.

Four months, that's a really affected our business performance recently.

For the Q3 guidance and full year guidance.

Our current estimates and expectation for the Revpar recovery for the third quarter on the Fem hotel level, we are expecting the revpar in the third quarter will be recover to 70% to 75% of 2019 level.

And the 90% to 95% of fourth quarter.

This off Tucson, and 19 Neville.

Again.

I mentioned previously.

My prepared remarks, our current forecast and the revenue guidance very much based on there will be no.

No massive COVID-19, residuals happen again, but maybe off.

This year.

Thank you.

Thank you that's all my question.

Your next.

Question comes from the line of Praveen Choudhary from Morgan Stanley. Please ask your question.

Hi, Thanks, so much for taking my.

Carl.

I have two questions.

The first one is about lower tier cities I just wanted to understand.

What are the challenges that youre facing in lower tier cities. It seems like its going very well based on the pipeline.

But if you can talk about any challenges that you're facing in future and the SEC.

Wanda.

One relates to the other strategy, which is upscaling strategy.

Wanted to understand what portion of upscale hotel opening would be in lease and operating versus franchise and managed.

The reason for asking this question is to understand how long will it take before you can.

Have.

A good size of these hotels and during that time, what kind of costs do you have to income I remember previously you used to have very big Preopening expenses.

Should we worry about similar expenses going forward. Thank you.

Well, Sheila without you and.

Why are you sure. This is Hal will chair our hartzell.

The JV I'm glad you got yourself.

Is it to simply Utah, Xi'an Chengdu count that.

Yeah, I'll tell you too hard on the shelves on anyhow to each year cohort.

It took a pin pad this opinion.

If I may what made that decision to you.

In the foundry.

I think the intelligent dissipate she couldn't call. It therefore showtimes on the crew who the usual she does your critical with the shallow chewed up.

Yeah.

Okay.

<unk> for the lower tier cities.

Lower tier cities penetration progressing pretty well, but we have to say that we are still facing some of the challenges, especially for the local staff and also matching and <unk>.

Meeting the local customers demands for these areas we are continuously adjusting our strategies.

Fleet.

Especially on the sales team to improve this area.

For helping us to further penetrate Europe.

I mean, the shutdowns is top notch in some few positive child either union.

They bought me a heartbeat.

The charges.

I need it sounding foolish.

Uh Huh. He in addition, we also are trying to building up a localized employment and the staff team and are also supporting our lower tier cities penetration as well.

And to the fact that woman John D. G. P G.

She is doing worse than you think why needs with Wuxi.

Since U K itself.

We will be doing quite a lot of organizational restructuring, especially for those lower tier cities.

In different district in areas.

Yeah.

Oh man.

So one of them.

Parts of it and this is not something for.

For the balance sheet.

That's on them. Some don't go down he says Oh no.

Well remember that someone would you like the distance.

It is still possible last Republic Townsville.

Sure.

So he leaves.

So I'm Gonna Tom Please yeah.

Those ounces half of them are obviously, either coming out of that or.

That's the only honest.

I had those adult galvan since honestly Youngstown year lives.

Hey, Tom song or something for that either.

Joseph.

Yeah.

Okay.

Our push the EBIT.

What does he does.

It doesn't lead you to sign in Washington.

Sure Don.

Linda will have its own again.

So we also saw rooms under its own out and suddenly all nice solid.

The agenda.

Imminent.

<unk>.

Got some.

Oh adults on the water and the ounces.

The bulk of what you can see them.

So it sounds like.

It was a positive one legal bill.

And that.

So far.

Ballpark.

Okay.

Although there just wondering if that's it.

Oh Gee that so something in that.

Will a perpetual Iot and other headwinds.

Mostly.

Question about the sofa.

Giovanni.

Yes.

Most of Europe.

No.

That's all the motors that go hand in hand with them.

Monopoly on tissue.

I don't know Ronnie.

I noticed in the top.

Hopkins to the source of it.

On mobile right so.

Excuse.

Sure.

Without them, we can see.

Yes.

Most of them tend how would you do that.

So good luck with it.

I'm assuming in Nevada.

Okay.

I think I don't want you to see.

It's a little bit of it.

[laughter] okay.

So far too.

We divided the hotel's effluents in Q4 segments, which including economic middle scale upper middle skills as well as the upscale.

We think these four segments.

We always think the most interest.

Once you're interested parts as well as the attractive area.

Upscale upper middle scale and below and include those.

Economic middle and upper middle scale and afford the app scale on a settlement for China market, it's more like a consolidation.

That's the story.

Assuming.

That said the upscale segments hotel upscale hotel segments in China was run was kind of a supplementary.

Sure.

Sub grade material for the property developers as well as for the government it's not real.

Market driven investments many years ago.

There is a lot of existing hotels in the market.

Four two.

We have been cooperating with <unk> or the joint venture and we will do some incremental hotels in this area, but in the longer term. We are also trying to consolidate the market.

Bridging our capabilities.

Uh huh.

And for the.

Robbing model.

We will no longer use the leased and owned.

<unk> business model, we rather choose a franchised hotel management contract, which is the FX.

In current to stage.

Do you exploring.

Learning and doing the research in upscale hotel segment rather than.

The timing and we are going to get some return from those investments. Thank you.

Yeah.

Your next question comes from the line of Julien Zhang from high teens International. Please ask your question.

Hello, Good morning management. Thank you for taking my question. My question is regarding the hotel that was wondering to what extent you.

Oh, Yeah Churchill.

As you just mentioned.

Kentucky Green screens matrix would be helpful. Thank you.

Yeah.

Okay.

Uh huh.

At this point as quite a shock so that did you see the progress Okay. I think that up to today. We just are fulfilled a the one global digital platform already and now this is a.

Alrighty Alrighty launched it up my to do what you need at the edge for all of the hotel.

Uh huh.

And we showed them before the one digital platform and not only focused on the AR Venus appreciate your efficiency, but also just that you do something like that.

The loyalty and you win.

See I have a contribution and so.

We hope that we can ink pool.

See I have contribution from the but before that I think the the burnt orange and the Washington now.

Of the one times, though to a place that we hope that we can put you in the coming new yet to achieve.

Two the Iran. Attempting place that this is a target they've been talking to on the other hand.

Not only just the two four codes for the C. I S contribution, but also to pay the theaters attention to the.

Rahmbo loyalty platform.

The such as the requirement the membership you are cool month.

And according to the current plan, where we're gonna advocacy.

I'll officially launched the new global loyalty system.

To prove what we coined this is H one.

Well, we all be released officially at the beginning of October.

So that's that's into system program not only for coats for the one point, we hope that we can while it quickly just took deplore the one digital platform for all hotels in the edge.

We couldn't have two are the biggest value.

In the coming several years are you not coming yet by.

By the way anything does with shampoo Gwen by the operation efficiency improvement program by the CIA its contribution and a global loyalty. That's all thank you.

Yeah.

Okay.

And then I just wanted to cotton you know people don't she she's coin.

I think you asked a very good question and right now I think it's still too early to tell you the margin improvement of digitalization, because we are still in the first phase of setting up the infrastructure and preparing for the rollout right out of the company's focus is.

Sharpening the brand and the reducing the loss of operation and then bringing the brand back to Asia, but.

But your question is very important and it's also our midterm target as well I think you know putting into more digital Ah equipments and also solutions can help strongly supported.

Streaming life organization right now are we we have a rough target Dodge, we probably need to reduce I mean optimized like 20% to 30% of the stuff both in the headquarter and also the accretion level you know through the several years program and I believe.

Deals will contribute at least to push it you know at.

At least you know several percentage point regarding the margin improvement.

Thank you and that's great and helpful.

Yeah.

Your next question comes from.

This line of Simon Cheung from Goldman Sachs. Please ask your question.

Hi, Thanks for the presentation I've got two questions.

In the first quarter, you mentioned something related to the cleanup of the hotel.

Oh in particular on Ilan somewhat the law.

From the law branded hotel I wanted to get a sense about the update and it's great to see that you've maintained your guidance for year, one six to one eight.

Wanted to get a sense you know how is the trend looking like perhaps quarter to date through the third quarter and your competitor and therefore about achieving that target.

You know, what's the assumption you have baked in.

Four.

She's got guidance. That's the first question the second one.

If I.

Sure.

Guidance.

The revenue guidance, excluding or not excluding D H.

It seemingly like that you're expecting.

The revenue for D H with jumped to around call. It 600 million RMB in the floor.

Fourth quarter.

Come back to you I think second quarter, you're running at about 254.

So doubling.

I think that's basically driven by Revpar supposedly so at that level would you expect your EBITDA.

To be breaking even portfolio of DG DH operation individually. Thank you.

Okay.

Great.

She is.

Or the <unk>.

How to do this.

What's that changing auto quote you the dynamic between pilot when she wants to add some <unk>. That's one thing that's out of the way that wait until Monday in new housing.

It's a high yielding Pat.

On the Ges was hot.

That seemed to be able to give him a chance.

Paul.

<unk> got the underground coal John so for the <unk>.

That goes on that's a good that's a good <unk>.

Lots of fees under the one that's Andy which uses.

Sure.

Yeah.

Eli Brian as you May know.

Uh huh.

The brands.

It used to to penetrating into the lower into the.

Economic sentiment.

You May also know that we have for many other brands in this segment, including the hall, our hygiene and we are using different products too.

Further.

Alright, and enlarge our market share in this segment.

And the 40, Eli for sure that we are continuously going to to a quantity control and eliminating those unqualified Eli from.

Operations Thats why its pipeline.

So.

I wanted to clarify your question regarding the D. H I think your first one is asking about the guidance for the fourth quarter of DHS revenue in there correct and also the second one is that you wanted to understand the development of D. H in Europe.

Yeah, Yeah correct.

I am just using your full year guidance, which is your first quarter guidance seemingly you are baking in quite a bit of a step up in terms of our fourth quarter revenue expectations.

No.

That would be achieved.

Would you be able to kind of EBITDA breakeven by fourth quarter of this year.

We.

Two questions.

Uh huh.

I think yes.

First off I think the fourth quarter probably.

We are generally positive about DH improvement of occupancy, but will still be cautious about the recovery given.

There might be a fourth wave of the doubts of variants on the way so.

I think yeah we.

Based on our guidance the revenue for the fourth quarter, it definitely won't be the highest among all other quarters and.

But however, it still.

<unk>.

Do not reach the.

Breakeven point yet.

But having said that the company still working hard on striving for another government subsidy, which is related to the 2021 lockdown.

Okay.

Uh huh.

D H and all the development of.

Th brand first of all as we mentioned before we're bringing DH major branded back to China particular, Steinem Burger and also stable.

Oh, good Dodge I'm, sorry, push design et cetera, and also intra city and also the Max Max brand.

As the upscale brand.

Brand as well that's number one and in Europe, we are positive about the market consolidation in the in the lower tier second money, especially the economy.

Scale segment and Th brand is actually enjoy a pretty good market reputation, especially in terms of inter city in Germany.

And is there left in the northern part of Europe. So we're going to continue to grow. These two brands are combining both deep model and also management franchise model in Europe, and the meantime would also sharpened the top brands like the <unk> Burger and the Max by further improving the.

Product design and also infrastructure facilities as well in order to establish a shotgun burger as a truly upscale brand in the Europeans are.

Markets and also trying to find.

The right expansion model across the globe.

Okay perfect. Thanks, a lot that's very.

Very helpful. Thank you.

Your next question comes from the line of Bruce Me from UBS. Please ask your question.

Hi management. Thanks for taking my question. So I have two small questions.

The first time.

The price we mentioned.

The challenge we assume.

Penetrating into lower tier cities is to meet the different franchisees. So may I ask are currently for the hotels in the pipeline of new signings in lower tier cities, how much off from the cool brands, such as hunting energy hotel and how much is.

Previous off brand.

And my second question is that.

If we look at the thing brand. So how is the take rate in lower tier cities compared with tier one tier two cities. Thank you.

Uh huh.

This is harper Danny hunting coaching GE Ito and sue them and so it's one of the Ping, an entrant, Jim which handsets in the south and if at any minute.

And good cheer MPD done at that point.

She said that she soup.

Seeing how the see the.

That puts us.

To add anything.

Yes.

Shopping quoting on the Pulpwood, Washington Street.

Oh, Hi, Giulio Baton negotiate tend to leave in which introduces the hunting and jewett.

For our current lower tier city penetration.

Okay.

The currency from our one year's earnings G. G hotel in the hunting brand US two of the key brands for the for the penetration at accounts roughly 70% to 75% of the new signings and then some other brands such as always Orange as well as me are also progressing pretty well.

Sorry can you. Please repeat your second question.

Sure. So my second question is if we look at the same brands for example.

As an example, so how is the take rate for example, the franchise fees are comparable between.

Laura to go to lower tier cities and.

Well tier two cities.

I just want to understand.

Margin comparison between the lower tier cities and tier one.

In cities.

What you don't want to own the English sheep.

Our take rates in Europe.

Yeah.

Sure.

PV diesel.

Sue them inside China.

This will fade out.

All of them.

Industry improvements G suite pick revisit F&B talking about EMEA relating to Europe.

Our our take rate for hunting ended G hotel brands in the lower tier cities are very close to the higher.

Tier cities or at similar level as you may see that our Crs contribution in the lower tier city are very close to the higher tier city. Therefore at the percentage per practice.

The charter rate or the take rates are very similar to each other thank you.

Okay. Thank you. Thank you that's all my questions.

Okay.

I would like to have had a conference back to today's presenters for any closing remarks. Please continue.

Yeah.

Thank you everyone for taking your time with us today, and we look forward.

Forward to conduct with you again in upcoming quarter, Thank you and goodbye.

Yeah.

This concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Okay.

[music].

Yes.

[music].

Good day and thank you for is studying by all come to the watch you Group limited Q2.

2021 earnings conference call.

At this time, all participants are in listen only mode.

After the Speakers' presentation, there will be a question and answer session.

You ask a question during the session you will need to press Star one on your chart, though please be advised that today's conference is being recorded.

If you require any further assistance. Please press star zero I would like to have a corn price over its your first speaker today, Jason. These go ahead.

Thank you Karina.

And good evening, everyone. Thanks for joining us today welcome to <unk> group's 2021.

One back on the quarter and incur an earnings conference call.

Joining us today is our founder and CEO, Mr. Chi Chi our President Mr. James Lee, Our Chief Digital Officer, Mr. Joseph <unk>, our CFO, Mr Wei our deputy CFO.

And Mr. Li.

Forward.

Statements involve inherent risks and uncertainties.

As such our results may be materially different from the views expressed today.

A number of potential risks and uncertainties are outlined in our public filings with the SEC.

<unk> group does not undertake any obligations to update.

Looking at any forward looking statement, except as required by applicable laws.

On our call today, we will also mention adjusted financial measures during the discussion of our performance reconciliation of those measures to comparable GAAP information can be found in our earnings release that was distributed.

<unk> day to day.

As a reminder, this conference call is being recorded the webcast of this conference call as well as supplementary slide presentation is available on the <unk> group's website at IR Dot two dot com with that now I will turn the call over to Mr. <unk> Mr. <unk>.

Yes.

Good evening everyone.

Thank you for joining us today.

I would like to give you an overview of Marvel business.

In the second quarter, Alright, our chime in a little harder to covered it to 102% over the same period.

Please.

19.

Supported by strong leisure traveling in Hong you made at.

Obviously at the final relative weak heart recovery in June due to COVID-19 resiliency.

In Guangdong province, and the traffic control.

In Beijing.

However, unfortunately.

A variant of a COVID-19 was again detected in Nanjing since Atlanta July.

We had a fever.

Peter.

Trading into many other provinces and cities that have vibrant.

From promoted into the Chinese government posted another run now subject to traveling restrictions which seriously.

Our performance August.

Our European business saw some positive trends.

With a Europe hardware covered into <unk>.

15% to.

3%, our 2019 label during the summer holidays.

It was mainly due to the continued progress.

As a nation under is pitching.

Is.

However, we remain cautious on the future recovery.

The European governments.

He is special to the German government deal carefully monitoring the situation.

Regarding the deal until every variant and potential impact for <unk>.

<unk>.

Looking ahead, our 13th our certainties borrowed by the pandemic may exist.

<unk>.

For a longer than expected.

Expected at a time.

<unk> to be well prepared to overcome any business.

<unk>.

Near term.

Nevertheless in the long time.

We have a higher confidence in China's future.

Economic growth.

And I think.

The upward trend of the China lodging industry remains intact.

Therefore, we will be in <unk> maintained our strategies such as further penetrating over low tier cities.

Beating up upfront.

An.

And upscale segment.

Although the upgrades on the talent acquisition.

<unk>.

Interesting on higher quality hotel expansion to support our sustainable growth.

Is that our turn the call to accumulate.

The update our returns have been given to them. Thank.

Thank you.

<unk> here.

<unk>.

<unk> has <unk> the gene that we're putting in.

And our theory.

So Archie Goliath.

<unk> really revenue.

Hi.

With with our Audi and Julien <unk>.

Our APAC and Europe, Sanjay it sounds interesting.

Thank you Gigi as usual I will discuss our recent business recovery trends in details.

Please turn to page two.

For the second quarter, our Revpar recovery ratios upward trends with Revpar in acro.

And it may recover to 100% and 106% respectively.

Hello tissue Jami, so youre more condo each incur between Oakland.

The revpar suitable useful frontline rural Mosquito control Herbert you may inch up Chunghwa tillage keytruda.

However, as mentioned by <unk> earlier due to the COVID-19 research honesty income and traffic controlling Beijing since late May.

Our revpar recovery in Joe June slowed down chip.

If we excluded the impact from the control and the Beijing our Revpar.

For the remaining areas was on track in June.

Sure.

R&D in cellular immunotherapy.

Dean <unk>.

So the trend wording changing the jamba switching tissue without that Jody <unk>.

He is with us by tons ounces, we launched several new oncology.

Cover infrastructure.

Biology that revpar.

We are in June and the revenue.

Hello.

Unfortunately things late July a new wave of Delta virus or COVID-19 was detected again in Nanjing and spreading into many other cities in China posted that.

<unk> through the government imposed another round of strict traveling restriction, which negatively affected travelling demand at significantly affected our business.

August was normally a peak season for traveling therefore due to the impact from the Delta environment as the historical high base.

Sop.

The 23rd our Revpar only recovered to a 46% of 2019 level.

So seamless.

So schindler lesion et cetera onwards, and potentially look like once you have a dilution of <unk> <unk>.

Jason Mead Johnsons St James.

River, we saw the residency.

Of all the profit out of Rins has been largely content.

Good.

Our provision measure posted by the government the newly confirmed case declined significantly from the peak in <unk>.

Julianna product Hermes genius M&A continuing to begin the slowdown China.

Hi, Judy submission golf channel by Dr. John <unk> since Alabama juices.

Please turn to page three for the hotel development.

We achieved a record number of new signings at one 502 for the first half of this year increased.

By nearly 50% year over year.

While many charters on the 30 <unk>.

Josh will tweaking Chongqing, Uruguay knowledge of the Emperor Qin chaired by Dr. George <unk> cancel.

This is Tom can talk a lot of avenues.

At the same time, our lower tier city penetration.

As for the accelerating.

Lower tier cities proportion accounted over 50% for both our current hotel pipelines and a new signings.

So on one hand.

And still forecast rollout year sources, our Chengdu shall be judge Union <unk>.

Moreover.

We have already penetrated into over 1000 cities as of June, including both hotels in operation and the pipeline added 200 cities compared to the same period of last year.

<unk> Yep, good genes from Sheila Charlie <unk> quite comfortable launching the chance.

Into that change.

<unk> total Asia Asia.

However, please note that given the travel restrictions due to the Delta virus of COVID-19, as we mentioned above our risks in some new signings in the construction progress. We're also actively affected.

In.

Without these fees.

<unk>.

Well Mcdonalds Toyota <unk> can do this it's just how far that cheaply.

<unk> nitrogen zone, some goddamn thing, where they can buy bulk water juices regime synergy.

<unk> seen maintenance.

Please.

Turn to page four for our upper middle of the hotel segment.

We will use multi brand strategy to further exploring the market opportunities our up Middle Hotel brand portfolio includes crystal Orange Intercity mature machine Madison.

<unk> and <unk> due to the <unk>.

Early in the new year, so more than saying Judy in Sweden with the new account pipeline. This slow down way down by <unk>, usually the early highest annual momentum more than jordanne slowdown honestly on Johns hopefully change yet.

As of June 2021, we.

We have a total of 404 upper middle of hotels in operation and a 248 in the pipeline we.

We are targeting to achieve over 1000 upper middle of hotels in operation and pipeline by the end of 2023.

She is overwhelming shamble of civil wasn't positive.

So it's really changing through banking side, so I'm as I called out.

Towards the end of Q2 book.

Yes.

Yeah.

On <unk> of July we announced that.

We announced a license agreement or changed Eisenberger and of course design group to establish a drawing hotel.

We achieved this is another breakthrough into the upscale and luxury hotel segment globally. Please turn to page five.

<unk>.

It's a change of heart.

Most of the EBITDA.

A party obstacles are associated with it.

We are planning to open at least.

<unk> eight hotels in next 10 years.

Hotels will be all located in prime area of international Metropolitan Euro ensure coordinated Jordan designed to assist with embedded <unk>.

So below or above that hurdle and Angola <unk> either.

<unk>.

The other is in Nevada that I can do this.

<unk>.

Similar to other international Hotel brand cooperation with luxury Brian our cooperation with Porsche design Grant will further enhance our stocking versus brand positioning and awareness globally.

It would help us to catch more opportunities in upstream.

Orlando and luxury segments in the future.

Sure.

This is on the <unk>.

The FY zero locally in placebo divisions into the previous <unk> <unk> per.

Among those in the kind of element there <unk> anything there.

Canadian.

<unk> group Chief.

<unk> <unk> JV and college in terms of the.

<unk>.

Now please turn to page six along with our lower tier cities penetration, our membership programs synergies to lower tier cities and affinity app traffic generation to hotels.

In the US the concerns that you may have.

We are very happy to see that our Crs contribution in lower tier cities achieved $2, 56% very close to the higher tier cities.

And it demonstrated our ability to further penetrate into lower tier markets.

<unk>.

The more each year.

So the only time they also jointly and still part of this I mean, you hit <unk>.

<unk>, ladies and gentlemen, and interchange Andrea.

So to the trends.

<unk>.

Okay.

We constantly are please turn to page seven we constantly.

Currently emphasized on the data security matters and it is the bottom line and the highest priority for our tool first of all we have established that information to create these committees and setup the informations to create these tender.

<unk> also advanced.

Tim Horne our EMEA.

Tom Waller, each year, which equals the insurance.

<unk>, an Indian year audio controller ISO sheathing.

<unk> do you think you'd have.

Regarding other controller, ISO or cheat sheet in Europe.

Although some of his homework guidance than the board's each within.

Learning a Z.

Auto headquarter <unk>, Belgium.

Secondly, our data are all safety locally and lastly, we had received various certificate on day, that's accretive action.

As shown.

In our slide in year of 2019, <unk> became the first domestic hotel group, which received ISO two 7% or $1 certificate and in 2020, what will become one of the global hotel groups, which received ISO 277 or $1 certificate.

Additionally, our tool has also up tend to the P. T. I E S S payment card industry data.

Data is accretive standout certificate.

So in that revenue.

So yes, you said hope you don't know about supermarket channel.

Some of the GT Conan placebo.

Jean <unk>.

<unk>.

Joseph <unk> corner.

While <unk> and <unk> Island.

Palin chiefs of the DH would be meaningful progress with the distributor.

Please turn to page eight.

We acquired.

<unk> Deutsche Hospitality.

Launched 500 days digitalization plan for it.

And so second quarter, all functions and the systems setup is completed and they are ready to use.

We are now in the stage of massive rollout was targeting two hour to 70% of DH hotels.

At end of this year and 100% of accomplishing next year.

Yeah, I'd add John to your Hearts are already boutique hotel with a solution.

Now I will turn the call to <unk>.

Sure.

Second quarter operational and financial performance.

Thank you.

Good morning.

And good evening to everyone wherever you are let's move on to our operational and financial review second quarter of 2021 as shown on Slide 10, Our hotel network expanded by 15% second quarter to 692 key.

Compared to.

The second quarter of last year of 590 <unk>.

D H legacy modular hotel network expanded by 16% year on year to roughly 668 cables in the second quarter.

Well all hotel turnover in the second quarter.

Our total turnover grew by 98% year on year.

To RMB 13 billion in the second quarter. It was mainly due to our continued network expansion in China and then the initial recovery of Deutsche hospitality operation as well as the low base for both China and.

For our PM business last year.

Excluding BH legacy <unk> hotel net turnover grew 95% a year on year to RMB 12, 7 billion in the second quarter and recorded <unk> 45 per cent pitch increase if compared with the second quarter 2019.

In Europe. The growth is mainly driven by the hotel network expansion under the asset light model.

Turn to page 11 legacy <unk> blended revpar for the second quarter grew 2% from 2019 to RMB 210.

ADR.

19 second quarter grew by 8% to RMB 255 compared to 2019.

While the occupancy in the second quarter is due five percentage lower compared to 2019 was mainly caused by the COVID-19 situation, especially the resurgence in Guangdong Province, and also.

In our control in Beijing in June.

Turning to page 12, our legacy DH business.

So initial recovery in the second quarter since German government imposed lockdown from last November 10th.

Thanks to the continued progress of vaccination and the restrictions.

<unk> is a legacy DH blended revpar for the second quarter grew 26 percentage to 20 euro compared to the second quarter of 2020.

The occupancy improved by six percentage points compared to the last.

Second quarter last year.

The trial, the ADR dropped by 6% to euro $82.

Yeah.

Please see our financial results on slide 13.

Total net revenue by 84% year on year to RMB, three 6 billion in second quarter 2021 excuse.

Excluding DH legacy module recorded in <unk>.

85 percentage year on year growth rate to RMB, three 4 billion.

The revenue was slightly below our previous guidance was mainly due to the COVID-19 resurgence in Guangdong Province.

Traffic controlling.

Beijing as mentioned before.

Excluding the impact.

The above mentioned areas the revenue growth was actually in line with our previous guidance.

Breaking down the revenue of the second quarter leased and owned the revenue increased by 85% year on year to RMB.

$2.3 billion.

Excluding the age the beads and own the revenue of legacy Quadro grew by 84% year over year to RMB, two 1 billion.

Net revenue from <unk> and franchised hotels grew by 89% to RMB one.

Mainly driven by the 89% year on.

Year growth legacy quadrant.

Due to the further expanding hotel networks with Aetna life model monetize and franchise revenue contribution in large to 36 percentage in the second quarter compared to compared with the 35 percentage in the second quarter 2020 at the group level.

So like I say goodbye to the men and tried to and franchise model also expanded to 38 percentage in the second quarter of 29 to one compared to compared with 37 percentage a year ago.

Okay.

Now, let's move onto those calls and profitability section on slide 14.

In the second quarter of 2021, the reported operating income turned positive to RMB $629 million compared to a loss of RMB 494 million last year and a loss of RMB 575, a quarter ago.

Mainly due to the business.

Our rates in both China and Europe.

Excluding D H the legacy quadrant operation income in the second quarter of 2021 was on the $763 million compared to a loss of RMB 207 million last year and a loss of RMB 172 minute a quarter ago.

Recall.

The hotel operating cost and other operating costs for the second quarter of 2021 was RMB two 8 billion.

Increased by 28% year on year.

This was mainly driven by the legacy <unk>, which recorded RMB two two bill.

Billion costs hotel operating costs, integrating 829% year on year growth the.

The increase was mainly attributable to the higher rental costs of the new upscale hotel Hyatt hotel level personnel costs as we expand growing our hotel networks rapidly.

And the higher D&A, depreciation and amortization cost, which were related to the upscale hotel openings and upgrading of existing hotel.

As we mentioned in the previous quarter, all future expansion of our upscale hotel with daily use S N life model.

Therefore, our pre op pre opening costs declined by 84% year over year and 20% Q on Q2, only RMB 16 million in the second quarter of 2021.

Our SG&A in the second quarter of 2021 increased by 49%.

<unk> year over year to RMB 553 million, mainly driven by the increase of legacy watchman, excluding the age the SG&A for <unk> increased by 71% a year over year to RMB $423 million.

Increase was mainly attributable to the increase.

Selling and marketing expenses due to the revenue recovery the increase of head count for our BD teams support penetration into lower tier cities. The increase of personal cost for upscale business unit and the increase of the investment as well.

Other operating income in the second quarter.

2021 increased by 121 percentage to RMB $362 million.

Mainly due to the 38 million euros subsidy received from the driven German government. This is related to the 2020 lockdown period.

Turning to page 15, our adjusted EBITDA income turned positive to RMB 1 billion compared to a loss of RMB $97 million a year ago. The age of the EBITDA loss in the second quarter was RMB $73 million narrowed from RMB.

$235 million last year, mainly due to the government subsidy.

Excluding DH, let's see what you recorded adjusted EBITDA income of $131.1 billion RMB.

<unk> by 709% instead of quarter of 2020.

In the second quarter of 2021, we recorded adjusted net income of RMB $464 million compared to a loss of RMB 476, a year ago.

<unk> D H legacy quadrant recorded an adjusted net income of RMB 579.

Compared with RMB 253 million loss in the second quarter of 2020.

The non-GAAP the non-GAAP pro forma adjustments mentioned.

At this stage.

Unrealized gains or losses from fair value change of equity is related to some of our investments.

Turning to the cash position, we further lowered our net debt of.

On the $4.4 billion by the end of second quarter compared with RMB five 2 billion by the end of the first quarter and there is no risk of breaching the financial covenants of the covenants of the U S. Dollar 1 billion syndication.

The accretion level, our cash balance was RMB, six 2 billion and the utilized facilities.

Was RMB six 8 billion. This cash in bank facilities will allow us to further pay down bank debt in 2021 and also 2022.

And also will be used to weather any unforeseen unforeseen circumstances.

Coming to DHS update on page 18, the recovery is coming to the right direction, although the pass a bumpy.

Vaccination commencing December 2020.

Be speeding up in the second quarter of 2021 restriction will especially towards people who have recovered from COVID-19 infection and people with either complete injection or negative test result.

August 23rd about 64% of German population hasn't.

<unk> had at least one short and 59% of the whole population were fully vaccinated.

Occupancy is right to continuously from about 19% in Q1, 24% in Q2 and now it's about 50% in the AGA summertime.

The recovery ratio compare.

Two 2019 is about 54% in July and a 67% in August month to date.

Meantime, the age is taking further actions to reduce costs and preserve cash including negotiating for lease waivers streamline overhead.

At both hotel and headquarter level.

The impact of the extension of the Lockdown would be also partially offset by the short term worker allowance and also the special government subsidy of which 38 million euros subsidies have been successfully received and recorded in Q2 related.

Relating to the 2020 locked down.

Companies do you're working towards more government subsidy, which would it be related to the 2021 locked down.

The company's cash position is sufficient and do you have another 12 million euro credit lines available.

Okay.

Turning to page 19.

On guidance.

Considering the impacts of COVID-19 resurgence in Guangdong.

Hi, good control of in Beijing seems late to me.

The impact of Delta bear in writing from 19 to several systems in China recently.

We lowered our Q3 and full year revenue guidance.

And for the third quarter of 2021, we expect net revenue growth to be in the range of 8% to 12%.

Paired with the third quarter of 2020 and for two 8% excluding D H two.

To provide a more meaningful guidance, excluding the impact of COVID-19, I can we expect.

Net revenue growth will be in the range of 12% to 16% compared to pre COVID-19 results in the third quarter of 2019, and a net revenue reduction will be in the range of 3% to 7% is excluding GH.

For the full year of 2021, we now expect the net revenue.

Gross.

Range of.

A 29% to 33% or to the range from 34% to 38%, excluding DH to provide a more meaningful guidance, excluding the impact of COVID-19, but we expect the net revenue growth will be in the range of 17%.

From 21% compared with pre COVID-19 results of 2020, not or to the range from 2% to 6% if.

Excluding DH.

Please note that our current revenue guidance is based on the expenses.

The reason Delta variant of COVID-19, some surgeons can be.

Well the thing by the beginning of September however, given the future situations cannot make is still uncertain and unpredictable when they need to adjust our guidance accordingly.

We also keep the Gras opening target of 1600, 800 hotels unchanged, but the signing speed of the new pipeline.

And the construction of the new hotels in the next few months will be affected as well.

With that let's open up for Q&A.

Yeah.

As a reminder to ask a question you will need to press star one on your telephone to.

To withdraw your question press the pound.

Yes.

Please standby, while we compile the Q&A roster.

Yeah.

Uh huh.

[noise].

Your first question comes from the line of yet Ho from Th capital. Please ask your question.

Yeah, Good morning management.

I have two questions.

Would you please give us some color on the member.

Yes.

Saturation, how so into Q, how many members new members newly added and what is your channel four member I Christy shouldn't. So that's just number one question number two in Europe Q3 guidance.

Yeah, what do you see until so your guidance what do you see in China in terms of.

Traveling hotel.

You know demand as well as the Covid.

It seems like you know the COVID-19 here or there or with pop up.

So I just wonder how.

<unk> seemed like in this guidance.

How much do you already see your guidance you know what's the base for your Q3 guidance domestic guidance. Thank you.

Okay.

[noise].

Yes.

[noise] [noise] Ah Yeah, it was too high to the CDO Lutetium <unk> choice.

Yeah, what I P O N T.

Hum.

Okay. Okay, let me take the switch to the English.

I think that kind of answer the one question I wanted to Miss it seems like for the second question.

Include to Plumb the.

Membership is a promise.

The number was 6 million increased okay anyway, I think that we continue.

The best practice.

Practice is to develop a new member to.

Develop a member recruitment as such or something like that.

The hotel business from the.

Also attaching point just to be sure.

To be trusted by the to the member and are hard to make sure that Oh, how to make sure that something like the the.

The Franklin.

Lindsey, Okay, but I mean, I think that's the second away. This is sop, we encourage our team and get the true development like the B to B and B to C.

From the local therapy and are covered with their teeth and number three this is our most important but.

Something that we say you know we said this is a well we do a lot of our partnership with a b to b to C or b to B to B, such as just the AR and AP and the Wechat and <unk>.

Like D D. We do this kind of a partnership with the money.

A useful way to do the external I mean, the types of say the membership of recruitment.

That's all my question. Thank you.

[noise] what else besides that.

Tricia.

Taylor.

So shouldnt be arguing.

Well of course.

Ooh with other genes.

Anyway.

With that well beyond that.

Got it.

Oh, Tien tsin, so cheap.

She can creep adult swim for the JV.

Yes.

Switching to fish.

The change in the country to barstool.

We've got them choose who they choose.

Jim.

Switching to dual credit and cyber and she will start you will suit the beautiful council. So you choose the Chi Ching.

King.

Well first of all attendees show.

So too.

Yeah.

For.

Q3 revenue days, Oh, we have to admit that the Chinese governments, how do you post a very strict on traveling restriction and a prohibition control mushroom months, that's a really.

Affected our business performance, our recently for the Q3 guidance and our full year guidance, our current estimates and expectation for their revpar recovery for the SEC.

Quarter on ascend hotel level, we are expecting the revpar in the third quarter will be recovered $2.72.

Two 5% of 2019 level.

The 90, 295% of fourth quarter of 2019 level.

Again as I mentioned previously in my prepared remarks, our current forecast and the revenue guidance.

To send a very much based on there will be no no massive COVID-19 residuals happened again in the remainder of this year.

Thank you.

Thank you that's all my question.

Yeah.

Your next question comes from the line of profit.

Chowdhry from Morgan Stanley. Please ask your question.

Hi, Thanks, so much for taking my call I have two questions.

The first one is about lower tier cities I just wanted to understand.

What are the challenges that youre facing in lower tier cities. It seems like its going very.

Very well based on the pipeline.

But if you can talk about any challenges that you're facing in future.

And the second one relates to the other strategy, which is upscaling strategy.

Wanted to understand what portion of upscale hotel opening would be in lease and operating versus.

As a franchise and managed.

The reason for asking this question is to understand how long will it take before you can have.

A good size of these hotels and during that time, what kind of costs do you have to income I remember previously you used to have very big Preopening expenses.

Should we worry about similar expenses going forward. Thank you.

We're seeing them without viewing.

But are you sure this is Chad.

Okay John.

I'm glad you got yourself.

She.

Has it changed at all.

<unk> seen the account to account.

We all learned.

Too hard to the shelves on lending to each year cohort truthful.

Hi, this is.

Let's see if I may only that G SEC.

Sandy.

I think we're gonna intelligent she.

You've been calling there for sure.

As usual.

Because your critical challenges.

Okay.

For the lower tier city is actually the lower tier cities penetration.

We're seeing crazy well, but we have to say that we are still facing some of the challenges, especially for the local staff and also.

Matching and meeting the local customers a month.

These areas, we are continuously adjusting our strategies.

Especially on the sales team.

To improve this area and for helping us to further penetrate Europe.

Uh huh.

So do you pause Charlie do you want.

So if I'm in Washington.

She the intestine.

And English.

Uh Huh. In addition, we also trying to beauty.

Localized employment.

And the staff team.

And are also supporting our lower tier cities penetration as well.

Shattering two five that woman John in the Triple digits G. Tunable since you didn't want to associate with the SEC.

Okay.

We will be doing quite a lot of you know cause that organizational.

Restructuring, especially for those lower tier cities.

In different district in areas.

Yeah.

Yes.

And then there's some losses.

And this is not something I'm honest.

D C.

It sounds like some of.

Obviously, there's no doubt.

Well remember that someone would you maybe this is al.

Module ASP Thomasville.

Sure that's really isn't it.

Some got a clean shop.

Uh huh.

Yeah.

RPC uses.

The only honest.

That does it all go down sometimes they got Tom here lies.

So that's one.

Yeah.

Uh huh.

You.

Pushing either.

Towards the debt.

What does he does.

Are you the same question.

Well Linda will have its own again, among the long haul.

So we ask that saw rooms under its only up and suddenly all lies solely to the NDA.

And with government on what you see.

He has got some.

$700, so a lot of data analysis.

The bulk of it.

Our team.

So our sensors.

As a part of the guidance only.

A sofa.

<unk> got a vessel.

Although their income.

A bubble that hit us.

Well a perpetual.

Iot and other headwinds.

When the government mostly.

Touching the DARPA and the telephone.

Jim.

Okay.

For the advanced.

Sure Joe.

Alright, Thats all in one does that guidance shippable.

That <unk> tissues.

So not wildly.

I noticed in the fields beyond tuck ins to the fourth of it.

On mobile lines so.

Excuse me.

Almost all of them we can see.

This is <unk>.

Most of them turned on.

It was so.

Good luck.

That element from consumer products.

Yeah.

And you kind of go down with the SEC.

So it's a bit of it.

Yourself.

Okay.

Sure.

We divided the hotel's affluence in Q4 segments, which included.

Economic mineral scale upper middle scale as far as the upscale.

We think these four segments.

We always think that most of the interest interested parts as well as the attractive area is dose upscale upper middle scale and below and include those economic middle end.

In the upper middle scale, and therefore, the upscale segment for China market, it's more like a consolidation.

The story.

As you May know that the upscale segment hotel.

Upscale hotel segments in China was run was kind of a supplementary.

Sub grade material for the property developers as well as for the government it's not real.

Markets driven investments many years ago, there is a lot of existing hotels in the market.

Four two.

We have been cooperating with <unk> or the joint venture.

And we will do some incremental hotels in this area, but in the longer term. We are also trying to consolidate the market.

By leveraging our capabilities.

Uh huh.

In the fourth quarter.

Dropping model.

We will no longer use the leased and owned.

<unk> business model, we rather choose a franchised hotel management contract, which is the <unk> line in.

In current to stage, we're still exploring and learning and doing the research in upscale hotel segment rather than.

Dan.

Timing and we are going to get some return from those investments. Thank you.

Yes.

Yeah.

Okay.

Your next question comes from the line of Julien.

John from Hi, Tony International Please ask your question.

Hello, Good morning management. Thank you for taking my question. My question is regarding the hotel.

I'm wondering to what extent Tuesday imagine food.

Sure.

That each transaction is you just mentioned.

Kentucky.

Right.

<unk> would be helpful. Thank you.

[noise].

At this point of pressure for the ditch to see the progress Okay I.

I think the up to today, we just are fulfilled the one global it into a platform right now this is a.

Alright, how long alrighty launched it up nicely.

Yes for all of the hotel.

Uh huh.

As we shared before the one digital platform is not only focused on that business operational efficiency.

So just that you do something like that.

<unk> and <unk>.

Yeah.

You watch it.

So.

We hope that we can ink pool are the sea ice contribution from the but before that I think the burnt orange and the Washington now.

Around the 1% to put that well, we hope that we can chew.

Such as the.

The requirement the membership you're a coolant and according to the current plan, we would have to say to officially launch the new global loyalty.

Sorry to prove what we coined this is H what are we all be released officially at the beginning of October.

But so that's that's it into system program not only focused for the one point, we hope that we can while it quickly just took deplore the one digital platform for all hotels, yet and then we kind of true up the business value.

In the coming several of you in the coming year.

By the way anything devotion program by the operation efficiency improvement program by let's see I have contribution on the global loyalty. That's all thank you.

Right.

I just wanted to cotton you know people don't she she's point.

I think you asked a very good question and right now I think it's due to early to tell you the margin improvement of digitalization, because we are still in the first phase of setting up the infrastructure and preparing for the rollout right out of the company's focus is still sharpening the brand and the reducing the loss of operations.

And then bringing the brand back to Asia.

Your question is very important and it's also our midterm target as well I think you know putting into more digital Ah equipments and also solutions can help strongly support the company streamline its organization right now are we.

We have a rough target Dodge, we probably need to reduce I mean optimized like 20% to 30% of the stuff both in the headquarter and also the accretion level you know through the several years program and I believe this will contribute at least to push it you know.

And each day, you know several percentage point regarding the margin improvement.

Thank you and that's great and helpful.

Oh.

Yeah.

Your next question comes from the line of Simon Cheung from Goldman Sachs. Please ask your question.

Hi, Thanks for the presentation I've got two two questions I remember in the first quarter, you mentioned something related to the cleanup of the hotel.

In particular on the land somewhat the law branded hotel I wanted to get a sense of both the update and is grateful to see that you.

And your guidance for year, one six to 1001.

Wanted to get a sense you know how is the trend looking like perhaps a quarter to date through the third quarter and you'll come with it and that's all about achieving the targets.

And do you have baked in.

Our fault.

She's got guidance that's the first.

You mean second one.

If I.

Use your forward guidance.

The revenue guidance, excluding or not excluding DH.

It seemingly like that you're expecting the revenue 48 with jumped to around call. It 600 million RMB.

Fourth.

Question to come.

Come back to I think second quarter, you're running at about 254.

Thank God, that's basically driven by Revpar supposedly so at that level would you expect EBITDA to be breaking even for your teacher DH operation individually. Thank you.

Quarter.

Great.

<unk>.

Oh boy, the JV machine female.

<unk> revenue.

This is Hal.

So its easier to quote you the dynamic.

What do you need to tell you that's one thing.

It's Andy.

Oh.

So let's say in Europe.

Uh huh.

Being able to own that Jesus.

That seem to be able to give him a chance.

She has a pool.

But as a way to pull the Chi Chi caused the other one called John So I'll tell you.

Before it goes on that's a good.

This isn't changing either ottens I see apostrophes, Oliver Wyman, Sandy, which you said it well.

But what you like Brian as you May know anyway, so our self the Brent.

It used to treat penetrating into the lower into the economic sentiment.

You May also know that we have.

So other brands in this segment, including the Hall.

Hi.

And we are using a different product.

<unk> two.

Further penetrate and enlarge our market share in this segment.

Eli.

Sure that we are continuously going to chew up quantity.

Many of them and eliminating those unqualified Eli from what our operations as well as pipeline.

Yeah.

So Simon I wanted to clarify your question regarding the D. H I think your first one is asking about the guidance for the fourth quarter.

Control of <unk> revenue.

Revenue in the correct and also.

So you wanted to understand the development of D H in Europe.

Yeah, Yeah, correct, because you know I'm just using your full year guidance, where it is Europe corner guidance seemingly you are baking in quite a bit of a step up in terms of it.

<unk> quarter revenue expectations.

If that were to be achieved.

Would you be able to attend.

Kind of EBITDA breakeven by fourth quarter of this year, that's the two questions.

Okay.

I think Europe.

First of all.

For the fourth quarter it probably.

We are generally positive about DH improvement of occupancy, but will still be cautious about the recovery given there might be a fourth waves.

Downtown variants on the way so.

Yeah, we are.

Based on all the.

I think as you know the revenue for the fourth quarter is certainly you know will be the highest among all the quarters and but however, it's do you know I think it's.

Do not reach the breakeven point yet.

But having said that the company still working hard on striving for another.

Guidance subsidy, which is related to the 2021 dot com.

Yeah.

Okay.

Uh huh.

Yeah.

And all of the development of the Th brand.

So as we mentioned before we're bringing DH major branded back to China particular Steinberg.

Government stable.

Dodge I'm, sorry, push design et cetera, and also interest city and also the Max Max brand as our upscale brand as well that's number one and in Europe. We are positive about the market consolidation in the in the lower tier segments.

Also especially the economy.

Scale segment.

Th brand is actually enjoy a pretty good market reputation, especially in terms of interest city in Germany and Italy.

In the northern part of Europe. So we're going to continue to grow these two brands.

Combining both deep model and awesome.

Many instruments franchise model in Europe and in the meantime would also sharpened the top brands like the <unk> Burger and the Max by further improving the.

The product design and also infrastructure facilities as well in order to establish Oh the.

Also remember that we're truly upscale brand in the European.

Market and also trying to find.

The right expansion model across the globe.

Understood. Thanks, a lot that's very helpful. Thank you.

[noise].

The second question comes from the line of Bruce <unk> from UBS. Please ask your question.

Hi management. Thanks for taking my question. So I have two small questions are the first time in a sense, who previously mentioned.

The challenge we assume.

Penetrating into lower tier cities is to meet.

Your franchisees I'm, Brian So may I ask a tragedy for the hotel seen pipeline of new signings in lower tier cities.

How much are from the cool brands such as hunting.

And how much is a soft brand.

And my second question is that if.

If we look at this thing brand so how are you.

Different to create in lower tier cities computer was tier one tier two cities. Thank you.

This is harper Danny hunting could change you know Sue will then.

So each one of them.

<unk> G, which handset.

Yeah.

The chimney PD is done at the moment.

She said that she said.

Seeing how the see the.

Talking with us.

To ask anything.

Yes.

Shopping quoting onto a pump with Huntington.

Our new haul high yield between negotiate and Selim, which introduces the hunting <unk>.

For our current lower tier city penetration.

So the pharma when youre signing a G. G hotel in the hunting brought us two of the key brands for the for the penetration.

Roughly 70% to 75% of the new signings and then some other brands such as always Orange as well as me also progressing pretty well.

Sorry can you. Please repeat your second question.

Sure. So my second question is if we look at the same brands for example.

As an example, so how is the take rate for example, the franchise fees are comparable between the.

Due to lower tier cities.

Tier two cities.

I just want to understand.

Margin comparison between the lower tier cities and tier one cities.

But you don't want to own the English sheep.

Our take rate has been.

Yeah.

Well I think the a.

TBD.

The woman.

Yes.

Yeah.

The other one.

Yeah industry P. G suite take rates as yet F&B, it's owned by somebody else.

Yeah.

Our our take rate for hunting and the Geo hotel brands and the lower tier cities are very close to the higher tier.

Cities or at similar level as you may see that our Crs contribution in the lower tier city are very close to the higher tier city are therefore at the percentage per practice.

The charter rates are the take rates are very similar to each other thank you.

Okay. Thank you. Thank you that's all my questions.

Okay.

I would like to have the conference back to today's presenters for any closing remarks. Please continue.

Yeah.

Thank you everyone for taking your time with us today, and we look forward.

To come back with you again upcoming quarter, Thank you and goodbye.

Yeah.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q2 2021 Huazhu Group Ltd Earnings Call

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