Full Year 2023 GreenTree Hospitality Group Ltd Earnings Call
Participants
Rene Vanguestaine; IR; Christensen
Alex Xu; Chairman of the Board, Chief Executive Officer; GreenTree Hospitality Group Ltd
Selina Yang; CFO; GreenTree Hospitality Group Ltd
Dan Xu; Analyst; Morgan Stanley
Presentation
Operator
Hello, ladies and gentlemen, thank you for standing by for GreenTree fourth quarter and fiscal year of 2023 earnings conference call. (Operator Instructions)
I would now like to hand the meeting over to your host today, Rene Vanguestaine with Christensen. Please go ahead.
Rene Vanguestaine
Thank you, Darcy. Hello, everyone, and thank you for joining us. GreenTree's earnings release will be distributed shortly, and will be available on our IR website at ir.998.com as well as on PR Newswire services. We have also posted a PowerPoint presentation that accompanies our comments to the same IR website.
On the call from GreenTree are Mr. Alex Xu, Chairman and Chief Executive Officer; Ms. Selina Yang, Chief Financial Officer; Ms. Megan Huang, Vice President of Sales and Marketing; and Ms. [Ellen Zhao], Financial Director.
Mr. Xu will present the company's performance overview of the fourth quarter of 2023, followed by Mr. Zhou, who will discuss restaurant business operations. And Ms. Yang and Mr. Zhou will then discuss financials and guidance. They will be available to answer your questions during the Q&A session which will follow.
Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the US Private Securities Litigation Reform Act of 1995.
These forward-looking statements can be identified by terminology such as may, will, expect, anticipate and future intends, plans, beliefs, estimates, continue, target, is or are, likely to, going forward, a confident outlook and similar statements. Any statements that are not historical facts, including statements about the company and its industry are forward-looking statements.
Such statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known and unknown risks, uncertainties and other factors, all of which are difficult to predict and many of which are beyond the company's control, which may cause the company's actual results, performance or achievements to differ materially from those in the forward-looking statements. You should not place undue reliance on these forward-looking statements.
Further information regarding these and other risks uncertainties or factors is included in the company's filings with the US Securities and Exchange Commission. All information provided, including the forward-looking statements made during this conference call are current as of today's date.
The company does not undertake any obligation to update any forward-looking statement as a result of new information, future events or otherwise except as required under applicable law.
It is now my pleasure to introduce our Chairman and Chief Executive Officer, Mr. Alex Xu. Mr. Xu, please go ahead.
Alex Xu
Thanks, Rene, and hello, everyone, and thank you for joining us today. We had a good and stable fourth quarter in our hotel business and continued to make progress in restructuring our restaurant business. Hotel RevPAR increased 23.3% year-over-year reaching 110% of its fourth quarter of 2019 level during the October national holiday, restaurant average daily sales were up 14% year-over-year.
We continue to streamline our hotel and restaurant operations to increase efficiency and quality. We are working on optimizing our products and service standard to further improve our brand identity for each of our hotel brands.
In our restaurant business, we are focusing on growing our network of franchisees as we expand the number of street stores while reducing our footprints in shopping malls and supermarkets.
Now please turn to slide 5. Compared with the fourth quarter of 2022, hotel RevPAR was RMB128, up 23.3% and restaurant ADS was RMB5,433, up 14%. Total revenues were RMB372.2 million, up 3.2%. Hotel revenues reached RMB289.6 million, up 21.7%. The increase in total hotel revenues was primarily due to the continued improvement in RevPAR and the increase in the number of hotels.
Income from operations increased to RMB23.1 million with a margin of 6.2%. Adjusted income from operations, excluding other general expenses, which include the provisions for trademarks, especially to due to the acquisition of the restaurant business, loans receivable related to franchisee loans and impairment of assets increased to RMB99.2 million with a margin of 26.7%.
Net income was RMB7.4 million with a margin of 2%. Adjusted EBITDA as non-GAAP was RMB161.3 million, plus up 2.1% with a margin of 31.3%.
Slide 6 shows detailed numbers for total revenue income from operations, net income and adjusted EBITDA. On slide seven, RevPAR was RMB128. At the bottom of the slide, you can see the weekly RevPAR performance in the fourth quarter compared with 2019.
RevPAR during the October national holiday was 110% of its pre pandemic levels but trended down for the rest of the quarter to the end of the year even compared with 2019.
Slide 8 shows the trend in our quarterly operating performance. In the fourth quarter compared to a year ago, RevPAR for our L&O hotels increased to RMB161. RevPAR for our F&M hotels increased to RMB127. ADE for our hotels increased to RMB241 and ADR for our F&M hotels increased to RMB175. Occupancy at our hotels increased to 72.5% and at our F&M hotels increased to 66.9%.
Slide 9 highlights the growth in our membership programs, which accounted for most of our direct sales, individual memberships grow to 91 million, up from 78 million a year ago. And corporate memberships grow to 2.05 million. That's up from 1.94 million a year ago. Slide 10 shows the operating performance of restaurant with ADS up 14% year-over-year at RMB5,433, but down sequentially due to seasonality starting.
With slide 12, our review our strategic execution across our businesses. In our hotel business, we further expanded in the mid to upscale segment and increased our penetration in Tier 3 cities and the lower cities.
As you can see on slide 13, we continue to grow our mid to upscale segment with 474 hotels, just 11.2% of our total portfolio at the end of the quarter. While the mid-scale segment remains the core of our hotel business with the 17.2%, we continue our expansion into the higher end segments. The economic segment remained stable at 18.6%.
Please turn to slide 14. We continued to expand in Tier 3 and lower cities and 73.5% of our hotels in our current pipelines are in such cities, and we will further capitalize on the substantial opportunities in such locations.
On slide 15, we continued to focus on increased profitability in our restaurant business, which closed unprofitable stores, mostly in shopping malls and supermarkets, increased the proportion of franchised and managed restaurants and expanded the number of street stores.
Next, Selina Yang and Ellen Zhao will review operating and financial highlights.
Selina Yang
Thank you, Alex. Please turn to slide 17. In the fourth quarter, total revenues increased by 3.2% year-over-year to RMB372.2 million. The increase was primary due to continued improvement in RevPAR and increase in the number of hotels.
Total hotel revenues increased 21.7% to RMB289.6 million compared to the fourth quarter of 2022. Total revenues for F&M hotels were RMB162.9 million, up 6.5% year-over-year, while total revenues from L&O hotels increased by 48.9% to RMB125.5 million.
On slide 18, total hotel operating costs and expenses increased 9% year-over-year to RMB252.2 million, excluding other general expenses consisting of provisions for trademarks, especially due to acquisition of the restaurant business, loan receivables related to franchisee loans and impairment of assets.
Our total hotel operating costs and expenses increased 3.1% year-over-year. Among the total hotel operating costs, operating costs increased 7.6% to RMB154.6 million compared to the fourth quarter of 2022. The increase was mainly due to higher consumer birth and the higher cost of general managers of franchised-and-managed hotels due to the increase of our F&M hotels and partially offset by lower utility.
Selling and marketing expenses were RMB8.3 million, a year-over-year increase of only 0.9%. G&A expenses were RMB49.7 million, down 12.5% compared with same quarter of 2022. The decrease was mainly due to lower staff related expenses and lower bad debt.
Turning to slide 19. Income from hotel operations increased from RMB13.3 million to RMB47.4 million year-over-year. And net income of hotels was RMB21 million compared to RMB7.5 million in the fourth quarter 2022. Adjusted EBITDA increased 82.8% to RMB107.7 million at a core net income increased from RMB47.8 million to RMB61.7 million year over year.
Next, let me turn the call over to Ellen, the Financial Director of our restaurant business.
In the fourth quarter, total restaurant revenues for RMB87.7 billion, a 29.2% year-over-year decrease, mainly due to the closure of (technical difficulty)
Please turn to slide 20. In the fourth quarter, total restaurant revenues were RMB87.7 million, a 29.2% year-over-year decrease, mainly due to the growth of L&O stores and partially by increase in ADS. You can also see the revenue breakdown for F&M restaurants and L&O restaurants.
On slide 21, total operating costs and expenses decreased 16.7% year-over-year to RMB118.1 million. You can also observe that down trends in materials costs, personnel costs and the rents.
Turning to slide 22. Loss from restaurant operations was RMB29 million. Net loss was RMB18.2 million. Adjusted EBITDA increased to RMB4 million year-over-year. Net income was RMB21.7 million.
Next, Selina will review the profitability of our Group, please.
Selina Yang
Thank you. Please turn to slide 23. Group net income per ADS, that's basic and diluted was RMB0.11. Group core net income per ADS basic and diluted non-GAAP was RMB0.87.
Let's now take a look at slide 24. As of December 31, 2023, the company had total cash and cash equivalents, restricted cash, short-term investments, investments in active securities and time deposits of RMB1,337.1 million. That's compared to RMB1,331.4 million as of September 30, 2023.
The minor decrease was primary due to investment in property and the repurchase of ordinary shares, partially offset by primary offset by bank loans and repayments from our franchisees.
Now slide 25. For the year of 2024, we expect total revenues of our organic hotels to grow 7% to 12% year-over-year, and total combined revenues from our restaurants and organic hotel business to grow 3% to 5% year-over-year.
This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session.
Question and Answer Session
Operator
Thank you. We will now begin the question-and-answer session. (Operator Instructions)
Dan Xu, Morgan Stanley.
Dan Xu
Thank you, operator. Good morning, management. Thank you so much for this opportunity to ask the question and congratulations on the fourth quarter result and also good work on narrowing the losses in the restaurant business.
My question is, I actually have not gotten a good time to look at the results in details, but I'm looking at the revenue guidance that Selina just mentioned. I just wanted to check with you for the full year guidance of 2024 of 7% to 12% for hotel business.
What are we factoring in terms of our drivers from RevPAR and also drivers from hotel opening? And how is our hotel opening plan for 2024? That's my question. Thank you.
Alex Xu
Okay. Thanks, Dan. The 7% to 12% of the hotel revenue up consist of the following factors. We expect continued improvement of the overall RevPAR, but only slightly where is at 2023. So that's around 2% or so the RevPAR growth. The balance of the growth are roughly 10% of the hotel numbers growth because we planned about the detail of the number of hotels opened this year.
We plan to be about 500, Selina, correct me if I'm incorrect in that number. And then also we will have a number of hotels in the transition period that is we have a relatively older portfolio comprised with some of the new starts comparator group.
So like the last quarter, we have taken down -- last year after the pandemic, many hotels into a renovation stage, then reduced by the room renovation stage. Then combined that we have been into a 7% to 12% of total revenue. So that's consist of that number.
And to further elaborate said that we're -- okay, why the only 2% of the RevPAR over 2023? Why not living more aggressive? Because last year, we've seen the RevPAR increase lot stronger than 2022 because of the post the pandemic and also many, I think pent-up demands from the Tier 3 cities where we have a larger percentage and 73%.
The Tier 3 cities, the RevPAR increase, I think were in the higher single digits compared with a double digits, 15% to around [15% to 13%], and third in the first tier second tier. So we expect the third year RevPAR growth to be a relatively flat from 2024 comparing with 2023.
And we will have more seasonality and up and downs. For instance, we have observed during the holiday season and during the weekend, we see a sharp increase, for instance, during the Chinese Spring Festival in the RevPAR -- in the overall ADR and occupancy, but then trended down and also relatively sharply just like in the first quarter national holiday and so imbalance and that there will be trending to be a little bit the upward then 2023.
And we will continue to add new products and new products has a better identity and can offer more family and leisure oriented elements. So we will expect a stronger RevPAR increase in the following several years after we complete this transition period. So that's our assessment here.
Dan Xu
Thank you, Alex. And can I just follow up with one question on the RevPAR? I saw that fourth quarter RevPAR growth in 2019 was mainly driven by ADR. And also, occupancy was still, although recovered, but still, I think around 10% below 2019 level, 6 percentage points below 2019, Q4 level.
So I'm just wondering, Alex, for your 2024, and if you look at your weekly chart, we are now maybe around 90% of 2019 as of March. Are you seeing this year 2024 with seeing occupancy increase year on year versus 2023, but ADR was a flat to decline. So resulting in this 2% increase or you would say is 1% plus 1%, both are growing? Just my last question. Thank you, Alex.
Alex Xu
Okay, thanks, Dan. The two actually are inter-related, if we lower the ADR then occupancy will be increased. So on balanced there is an optimal rate would, but we do not know what the optimum -- should the best strategy of achieving the optimum RevPAR increase.
However, we -- this is our plan. We plan to have a slight increase of the ADR, but the occupancy we expect to be relatively stable. So we would like to increase the run rate. And so, we expected that most of the growth should be the ADR.
And then once the ADR reached certain levels then we try to further increase occupancy. The occupancy -- some of the occupancy resulted from the seasonality. And also, I said the sharp up and down in the balance power pattern.
At the end of 2023 to 2024, we find there's a little bit higher trend in terms of holiday and leisure, and the family related travels. So that's more seasonal than the constant demand for the business travels. So which also resulted in a blended relative a little bit lower occupancy. So our internal projections to beyond the RevPAR -- the increase primarily resulted from ADR.
Dan Xu
Thank you, Alex.
Operator
(Operator Instructions) Dan Xu, Morgan Stanley.
Dan Xu
Hi. I have another follow-up question on the hotel opening. I'm just wondering for management, what's the plan for your leased hotel, the L&O hotels for 2024? Do we still have some hotels in the pipeline, and are we still continue to build net additions in leasing on hotels? Thank you.
Alex Xu
Okay. Dan, as we previously stated that we'll only build the office towers in the key like Tier 1 and the transportation hub at the showcase hotels. Currently, I think there is -- we plan a one to two showcase. It also (inaudible) flag ship brands such as GreenTree Eastern and the GreenTree Inn.
So there is single digit numbers there. And currently we are evaluating and that we are still focused on continuing to grow our hotel in the franchise and managed, that is our core competitiveness and strengths.
So let me elaborate that our overall business strategy again, the light of this question, 2023 is a transitional year. I think that we in the past, we tried -- we have evaluated the potentials for acquisitions and growing of the business, we've done many different approaches with also many more brands.
And now with the COVID and post COVID, and we have transitioned into focus more on the traditional and the fundamental approach to the hotel operations and hotel management, that is our objective is to deliver a consistent service and products to our customers, and we need to upgrade our little bit the aging portfolio.
So we have taken a larger number of hotels and giving our franchisee six months and most of the time to obviously one year time to renovate to a newer standard, which will find that we can substantially increase the ADR occupancy and therefore, RevPAR.
And we'll continue to build our teams to be more proficient and more efficient in both their career growth and our productivities, and they're delivering a consistent service quality to our customers.
And then thirdly, we're trying to implement and upgrade our existing technology platform to incorporate the new features, especially some of new applications in the technology industries to further improve our frontline employees' ability to serve our customers and then combine that we also have a restaurant and two great brands.
So there are not many brands can withstand the pressure on competition in the restaurant business for over 20 years. And fortunately, we have two great brands that's Bellagio and Da Niang Dumpling. And so we have started to build a brand and to use the core experience.
I understand that to expand in the franchised and managed model and we have managed to increase that, which will further increase, I think our profitability in the restaurant business. And slowly, we already seen the seed and trend and we're not obvious from the previous year. By now with the travel trends to be more leisure and also more family oriented.
We find that the leisure element such as the dinings becomes more essential part of the future hotels. So we do see more opportunities for us synergies between the hotels and the restaurants. And so that's our business strategy or we'll continue to focus on the fundamentals.
We'll find that the hotels we have built, and we have established that with our franchisees continued to perform very robust and that our service quality, we can see slowly becoming -- increasingly become more satisfactory to our customers. And the customer satisfaction scores are improving.
So even after this and post COVID transition period where there is a lot of hotels coming out of that has the wear and tears, but even with that conditions, we slowly improved our customer service scores. So we do see a great fundamentals to be built in the last year this year and next one to two years for a stronger growth in the near future.
Dan Xu
Thank you.
Operator
Simon Cheung, Goldman Sachs.
Thanks for taking my question. I've got three very quick questions. Just on your slide 8, where you laid out on the lease and augment the franchise RevPAR performance individually. I can help (technical difficulty) that the additional restaurant performance is much stronger than the franchise.
So Alex, you mentioned that you are modeling or expecting a 2% RevPAR growth, just wondering that obviously the franchise exposure is going to be keep increasing the weaker performance of the franchise or RevPAR. Would that be any way that would drive your overall RevPAR performance 2 percentage point?
On an individual basis or let's say, just from your observations, are you seeing any possibility that the franchise are starting to talk about that. Just generally wanted to get a sense how you're thinking of the respective segments and the aggregate of all? That's the first question.
And then a second one is in relation to the profitability of your book business, great to see you have some leverage in the last one or two quarters, but wondering -- and you also mentioned some synergy benefits opportunity to business. Can you just briefly tell about how you are seeing the margins maybe in the medium term for we spent respective business maybe in a two, three year time.
And equally, just also wanted to get a sense how you're thinking about the top-line growth for the actually the number of hotel and restaurant, because obviously for restaurants, for example, you've reduced your restaurant count by quite significantly over the last one year. So that hotel come [4,000] is that some medium that's out there that you have in your mind? Thank you.
Alex Xu
Okay, great questions. I will leave the third question to Selina about the restaurant business revenue has change. Because the restaurant business, the revenue has a sharp drop because we have closed the many direct owned leased and operated restaurants due to the impact from the lower traffic to the shopping malls and the supermarkets and for the malls.
So even though the number of restaurants, the segment trend that we have a little bit increased number of franchised-and-managed restaurant, while the number of directly owned have dropped, but the impact of the revenue was much larger.
But going back to the first question, leased-and-operated and the franchise well product trend. As we have said earlier, we built the leased and operated as a showcase hotels. So naturally with the showcase hotels, they tend to warm that route ADR wise and which as a service elements, more complementary services for the family to the businesses.
So as a result, the ADR has been improved much higher than the balance of the larger base from franchised restaurants or franchise hotels. But we do see that trend will be probably similar because many, many franchised hotels are going through the renovations once after the reservation system.
And the ADR, we expect the ADR will grow at the same level and our focus and the strategy right now has been focusing on the ADR driven growth strategy because you always have the option of lowering your price a little bit increases the occupancy and thereby taking the higher a little bit different market shares but resulted in an increase of the same level of ADR -- RevPAR.
But with ADR increases, I think we have got more room and a better potential and that to move the quality of the products into a higher and higher level. So for the next two years, and we expect the similar levels of growth for both L&O hotels and the F&M hotels. So that's one thing.
Another thing is that L&O hotels because we have gone through renovations with a lower base. So the percentage of L&O hotels have gone through the renovation is higher than F&M hotels. That's also drive up ADR increase a little bit higher. So I hope that answered the question for your first.
For the second question regarding the synergy and then also the restaurant business. We have experimental moving the restaurant with hotels combined with the breakfast delivery to be a three meals for the restaurant. And we have seen some good result such as in our G9 hotels in Shanghai, that increase the revenue substantially.
But moving the larger staff in the restaurant into the hotels and requires a new system and new operating standard. So we are doing the secondary experiment in the second tier city. So the first tier city we have down and those are many elements that we need to take into consideration.
For instance, the competition landscape of F&B in the buildings, some of the buildings that we lease the hotels already have other restaurant services and then also the space constraints. And thirdly, the staff constraints. And so that -- taken those three factors and we have taken a more experiment [fishier].
I know we have another couple of them opened, scheduled to be in the summer. So we'll report to you the result of the synergy in that area. And right now, I think experiments and forming the standard than system and building a better fundamental and making sure we are not also introducing the some of the uncertainty and higher competition in the restaurant business into the stable hotel business. So those are the elements that we are considering. So third question.
Rene Vanguestaine
Simon, could you please repeat the third question, which we think has to do with L&O hotels versus F&M going forward?
My third question is actually more related to broadly speaking, the number of hotels now you're running at slightly over 4,000 in restaurant over 200 now. I did hear that you have a hotel target additions 500 for this year, but in more like a medium term, do you have any target in your mind in terms of the come for both respective segments?
Alex Xu
Simon, our ambition and the plan is always that let build the fundamentals, then we'll build our growth plan that's compatible with our current resources so that we can continue that to improve our brand standard and brand identity. And so we plan internally the next three to five years and continue to grow our hotels by the numbers, but 10% to 15% per year.
And slowly hopefully, after we build a stronger fundamental -- build a stronger base, we can even further accelerate it, the growth. But right now because we have a number of issues and experienced and lessons we have learned through the past M&A, which also result in some of the legacy problems that also consumes our internal resources to restructuring those kind of businesses.
And also, to restructuring the restaurant and making sure the restaurant has a robust logistics system support to grow the franchise and the managed models, can we -- the hotels landscape is very clear and the restaurants was getting to learn the lessons and patterns of our strengths.
I knew which area such as community store, the street front stores and also the high traffic areas such as train stations, subway stations. And so once we have formerly built a profitable, robust business model then we will either grow more quickly. So that's our next mid-term plan.
Sorry, I haven't looked at the numbers yet, but then should the restaurant, are you done with all the [crusher]? Do you feel that your hotel, your restaurant companies pretty much bottom and likely kind of steady at least in the coming quarters?
Alex Xu
Sorry, Simon numbers (inaudible) that is correct. Right now, with a substantial completion, I think the restaurant reorganization is substantially completed. And so now we can focus on instead of closing our transitioning working restructuring of unprofitable stores that now we can focus on growing the franchise, the more profitable stores.
The legacy issues of the restaurant side, Simon, there's some primarily resolved. Then I think some of the locations our had the higher rent and that continued reduced traffic and so on. And it's more challenging to stay profitable even after our staff put in more efforts and it shows us restaurant we have already closed, substantially closed.
So we do -- we will expect that a number of restaurants and will also growing, but albeit initially, I think slowly. As we stated the pattern, and the system are still emerging. And restaurant conflict -- the competition in the restaurant is stronger than we originally estimated and expected.
And so we do not know the trend will continue, but we still think that the restaurant business, I think it will be more -- has a more characteristics and a challenging than the hotel business.
If I may, just a very final follow-up question. Just you mentioned a number of hotels that you're planning for some upgrades some of your 4,000 issued. How many of them that are going to upgrade, receptions of by the franchisee holiday willing to take indeed upgrades when you compare to your assessment of the entire portfolio?
Alex Xu
Right now, about half. I think that my last numbers came in about and half of them are in the renovations. And I think another half we expect them to be completed in the next three years and next two to three years.
Understood. Thanks a lot for the answers. Thank you.
Operator
Okay, thank you. I would like to turn the conference back over to Salina Young for any closing or in closing.
Selina Yang
On behalf of the entire GreenTree management team, we thank you for your interest in our company and your participation in today's call. If you have -- require any further information or have plans to reach us, please feel free to contact us. Thank you, everybody.
Alex Xu
Thank you.
Operator
And the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
