GreenTree Hospitality Group Ltd. American depositary shares, each representing one Class A ordinary share

Pardon me, everyone. This is the conference operator. Today's call will begin in approximately four minutes. Thank you for standing by. And once again, we will begin in approximately four minutes. Thank you. Thank you. Hello, ladies and gentlemen. Thank you for standing by for Green Tree's second quarter of 2024 earnings conference call. At this time, all participants are in listen-only mode. After management's prepared remarks, there will be a question and answer session. As a reminder, today's conference call is being recorded. I would now like to turn the meeting over to your host for today's call, Mr. Rene VanGusten of Christensen. Please proceed, Rene.

Thank you, Rukul. Hello, everyone, and thank you for joining us. Green Tree's earnings release was distributed earlier today and is available on our IR website at ir.998.com, as well as on PR Newswire services. As a reminder, we also posted a PowerPoint presentation that accompanies our comments to the same IR website. On the call from Green Tree are Mr. Alex Hsu, Chairman and Chief Executive Officer, Ms. Celina Yang, Chief Financial Officer, and Mr. Jason Zhang, our new Financial Director. Jason replaces our former Financial Director, Ms. Alan Zhao, who officially retired earlier this month. Mr. Xu will present the company's performance overview of the second quarter of 2024, and Ms. Yang and Mr. Zhang will then discuss financials and guidance. They will all be available to answer your questions during the Q&A session which follows. Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 as amended and as defined in the U.S. Private Securities Litigation Reform Act of 1995. These overlooking statements can be identified by terminologies such as may, will, expects, anticipates, aims, future, intends, plans, believes, estimates, continue, target, is or are likely to, going forward, confident, outlook, and similar statements. Any statements that are not historical facts, including statements about the company and its industry, are forward-looking statements. Such statements are based upon management's current expectation 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 obligations 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, Mr. Alex Chu. Mr. Xu, please go ahead.

Thanks, Rene. And hello, everyone, and thank you for joining us today. In the second quarter, we faced the challenges as China's economy continued to recover. We believe both consumers and business exercised caution in discretionary spending, which had a negative impact on our overall performance. However, we continued to upgrade a number of hotels in our portfolio in order to better respond to increasing competition. While we believe this will help our performance in the future, second quarter hotel revenue did decrease 14.8% year over year. We continued to execute on our strategy to return our restaurant business to profitability by moving away from lease and operated restaurant in supermarkets and the regional shopping centers towards franchise the three stores. As a result, the net income turned positive this quarter after breaking even last quarter compared to losses in both corresponding quarters a year ago. Our focus is now fully on growing the number of franchise street stores and stores with stable consumer traffic. Please turn to slide five. Compared with the second quarter of 2023, hotel rough par was 125 RMB, down 10.8%. And the restaurant ADS, that's average daily sales per store, was 4,737 RMB, down 22.1%. Total revenues were 329.7 million RMB, down 20.5%. Hotel revenues were 264.6 million RMB, that's down 14.8%, mainly due to a 10.8% year-over-year decrease in rural power and the closure of some old hotels, and partially offset by new openings. Restaurant revenue decreased to 65.3 million RMB as we continued to execute on our strategy to reposition this business and closed a number of underperforming restaurants. Income from operations decreased to 84.4 million RMB with a margin of 25.6%. Net income was 62.3 million RMB, down 38.9%, with a margin of 18.9%. Adjusted EBITDA non-GAAP was 83.1 million RMB, down 34.5%, with a margin of 25.2%. Slide 6 shows detailed number of total revenues, income from operations, net income and adjusted EBITDA. Slide 7 shows the trend in our quarterly operation performance. In the second quarter, compared to a year ago, Royal Power for our LO hotels decreased by 7.3% to 177 RMB. Royal Power for our FM hotels decreased by 10.9% to 124 RMB. ADR for our LO hotels decreased by 2.1% to 250 RMB. and ADR for our FM hotels decreased by 4.4% to 117 RMB, 171 RMB. Occupancy at our LO hotels was down 3.9% to 70.7%, and occupancy at our FM hotels was down 5.3% to 72.6%. Slide 8 highlights the growth in our membership programs, which accounted for most of our direct sales. Individual memberships grow to 96 million, up from 84 million a year ago, and the corporate memberships grow to 2.1 million, up from 1.96 million a year ago. Slide 9 shows the operating performance of restaurants with ADS down 22.1% year-over-year at RMB 4,737, but up sequentially. Starting with slide 11, I will review our strategic execution across our businesses. In our hotel business, we further expanded in the mid to upscale segment and in tier three and the lower cities in South China. As you can see on slide 12, we continue to grow our mid to upscale segment with 505 hotels. That's 11.8% of our total portfolio at the end of this quarter. While the mid-scale segment remains the core of our hotel business at 69%, We continue our expansion into the higher end segment. The economy segment ended the quarter at 19.2%. Please turn to slide 13. We continued to expand in tier three and the lower cities and 72.3% of our hotels in our current pipelines are in such cities and will further capitalize on the substantial opportunities in these locations. On slide 14, we continued to focus on increasing the profitability of our restaurant business. To achieve this, we have implemented a three-pronged approach to reposition the business. First, closing unprofitable stores. increasing the proportion of FM stores, and expanding the number of street stores. Franchised and managed restaurants accounted for 86.9% at the end of the quarter, compared to 72.3% a year ago. And street stores accounted for 45.4% compared to 37.9% a year ago. Next, Selena Yang and Jason Zhang will review operating and financial highlights.

Thank you, Alex. I will review our hotel business. Please turn to slide 16. In the second quarter, total hotel revenues decreased 14.8%, to 264.6 million RMB, compared to the second quarter of 2023. Total revenues from RO hotels were 105.9 million RMB, down 19.5% year-over-year. The decrease was primarily attributable to a 7.3% year-over-year decrease in the second quarter of RO hotels. five L.O. hotels closed, and the reduction of sublease revenues, mainly due to the disposal of property. Total revenues from F.M. hotels decreased 11.3% to 157.8 million RMB. The decrease was mainly due to a decrease in F.M. hotels' repa and the remodeling. On slide 17, Total hotel operating costs and expenses increased 2.1% year-over-year to 217.7 million RMB. Operating costs decreased 4.5% to 143.4 million RMB year-over-year, which was mainly due to the lower personnel costs, lower hotel-related material consumption, and lower utilities give a lower occupancy rate and the closure of RO hotels. Offset by increased rental costs and DNA due to newly opened RO hotels since the third quarter of last year. Salient marketing expenses were 13.2 million RMB, a year-over-year decrease of half million RMB, mainly due to lower advertising expenses. General administrative expenses were 54.9 million RMB, up 23.6% compared with the quarter of last year. The increase was mainly due to an increase in bad debt provisions for long-aged accounts receivables. Turning to slide 18, due to the decline in revenue, our hotel business saw a decrease in profitability in the second quarter. Income from hotel operations decreased from 108.5 million RMB to 81.6 million RMB year over year. Net income was 63.1 million RMB compared to 114 million RMB in the second quarter of last year. Adjusted EBITDA of hotel business decreased 37% to 81.9 million RMB, and the core net income decreased to 22.4% to 67.6 million RMB year-over-year. Next, let me turn the call over to Jason for the review of our restaurant business.

Based on slide 19, in the second quarter, we continued to refine our restaurant business and opened more franchise and management stores. Total revenues were 35.3 million RMB, down 37.8% year-over-year, and the total cost and expenses decreased 44% year-over-year to 34.3 million RMB, mainly due to lower EDS and the decrease in the number of I.O. stores. due to the closure of unprofitable oil stores. And on slide 20, this matrix lead to improved profitability. Income from operation was 2.9 million RMB. Adjusted EBIT was 1.2 million RMB. Net profit and core net income turned from loss to profit. Next, Selena will reveal the profitability of our group.

Thank you. Please turn to slide 21. Group net income per ADS, that's basic and diluted, decreased by 39.9% to $0.61 RMB. And core net income per ADS, that's basic and diluted non-GAAP, increased by 3% to $0.69 RMB. Let's now take a look at slide 22. As of June 30, 2024, the company had total cash and cash equivalents, restricted cash, short-term investments, investments in equity securities and time deposits of 1,737.2 million RMB compared to 1,517.1 million RMB as of March 31st, 2024. The increase was mainly attributable to continued operating cash inflow, the disposal of a property, and the repayment of loans from franchisees. On slide 23, considering our performance during the first half of this year and the impact of closing certain RO hotels due to lease expirations and strategic decisions, we have revised our revenue guidance for the hotel business. Now we anticipate its performance in 2024 to remain flat compared to the last year. As Board of Directors has approved the payment of cash dividend of U.S. dollars 10 cents per ordinary share or 10 cents U.S. dollars per American deposit share that's ADS payable to holders of the company's audience shares show on the company's record as closing of trading on September 30, 2024. This concludes our prepared remarks. Operator, we are now ready to begin the Q&A session.

Thank you. If you would like to ask a question, please press star then one on your telephone keypad. If you'd like to remove yourself from queue, please press star then two. Once again, that's $1 if you have a question. And today's first question comes from Bruce Mee with UBS. Please go ahead.

Hi, Alex, Celina, and Jason. Thanks for taking my question. So I have two questions. The first one will be regarding the hotel business. So could you please introduce a bit about the rare part trend in July and in August so far? on a year-over-year change basis? And also, we saw that you have changed your four-year hotel revenue guidance. So could you please also provide some color on the real-time outlook for the second half? And that's my first question. And the second question is regarding the shareholder return plan. And we saw that we have declared a cash dividend at this time. So will it be a long-term return? shareholder return plan.

Thank you. Regarding the hotel raw power for July and August, the Q3 in July, we saw a little bit steeper drop compared with the same period, the same July last year, around 15%. Then in August, the first half in August, our raw power and is catching up, recovered to about less than 10% of drop compared to last year. Last year, I think, was especially in the summer, the stronger year than the previous years. And so there is a correction from the record. I think we, you know, looking back, I think somewhat is more understandable. So that's the next two months. For the third quarter, we anticipate we will operate probably the same levels of reduction as the second quarter comparing with the last year, 2023. For the balance of the year, our projection is our total revenue side will be flat compared with the year of 2023 for several reasons. One, we have a reduction in terms of the raw power. We also have an increase in terms of new openings. we still anticipate and plan about 480 new openings, even though we have a short dip in the second quarter. But we're looking at the pipeline, the third quarter, first quarter will catch up. And that also will be offset a little bit by we have a reduction in the membership income somewhat. And also we have about 400 hotels in the upgrade mode because about 400 this year will be going through the remodeling slightly more than last year. Because last year was the first year we were coming out of the pandemic and we have given our franchisees some breathing room to operate the hotels, to generate some cash, to help their businesses. So this year we have planned and also encouraged a lot more hotels in going through the upgrade and the remodeling. So we typically give six months to one year of the grace period if we the hotels go through that remodeling phase and also in light of the challenging at least on the service hotel and restaurant industry we have given our franchisee a little more in terms of franchise signing application fees and various services and we have added the various services so you combined And so we'll see a revenue to remain flat compared with the 2023. Okay, so that's on the hotel business. And on the shareholder dividend, even though the second quarter we see a drop compared with the same revenue side with the same period of last year. However, you can see we still generate a very strong Cash flow and especially with our dispose of one property and added another 120 million cash into the bottom line and therefore we think and Anticipating the other growth needed capital. We think it is appropriate for the first half of the year and And we declare this dividend. We had a continued dividend policy before, which was interrupted by the pandemic. And our plan is to continue. And this dividend practice and the borrowing from any great growth potential requires for the cash infusion will continue to deliver sustainable, profitable growth. to the bottom line and deliver sustainable returns to our shareholders. So this is our long-term plan, and we'll continue to do this. So thanks, Bruce, for those two wonderful questions.

Thanks, Alex, for the answers. It's super helpful. Thank you.

And our next question today comes from Luan Liu with China Securities. Please go ahead.

OK, thank you. Thank you for the management team. And I have two questions. The first is about the demand. I wonder if there's a difference between the business and the leisure demand. Can you draw some colors on this question? And also, second question is about, is there any difference, like for us, for the second quarter, for our hotels, like in first and second tier city and the low tier city. Thank you.

Okay, with regard to the operation issues, I'll take them, Selena, then with the financial numbers, you'll take them. I'll take Wayne's question. The first question regarding the pattern changes in terms of the ratio between leisure and the businesses. we do observe the trend. There is more leisure travels than the business travels. And there are also higher demand in the third tier cities that, you know, typically we have the scenery and the resort area. And that also the cities where they have, you know, friendly climate temperatures, attract a lot more leisure travelers in the summer, especially in July or August. And so we do think that the trend will continue, considering we have a large number of retirees going into the retirement mode in the next few years. So the leisure travel, and especially the economy and the budget leisure travel, will continue to rise. And we are anticipating and planning for this. And the hotels in these areas are performing exceedingly well. And for instance, some of our hotels in those resort and summer retreat areas achieved even a record earnings and record occupancy. With regard to the first, second, third tier cities, we did have a trend which we can share with you. We see this year, the first tier cities, the raw power drops, at least in our business, the most at 12.5%. And the second tier, a drop of 11.7%. Typically the last year, with the finish of the pandemic, I think a lot more travels, business travels, generally businesses and also government for their business seminars and the business development activities are exceedingly very high. And we do see some reduction in that number. So the third tier, the most resilient in our model has a less of impact, about 9% reduction in viral power. So that's the phenomenon trend that we have observed. And we do believe this trend may continue for a while. So thanks, Wayne.

Thank you very much.

Thank you. And our next question today comes from Kelvin Wong with Mica Capital. Please go ahead.

Thank you. Good evening. Thanks for taking my questions. I would like to have three, if I may. I think that it's better for me to ask the question one by one so that that will make it easy to answer that. The first one is more, we look at it more on a broader top-down base. I'd like to know, could you talk about the trend of actually the whole industry, and how do you see this trend going forward? And at the same time, are you facing any difficulties at the moment, and what measures have you been taking to deal with these difficulties? And we would be glad if you could also give us a comparison of the company's performance in the second quarter compared with other peers. So that's my first question. I have another two after you answer this one.

OK. All right. Thanks, Kevin. Regarding the trend in the talk about the especially the hotel industry and then later can touch about the restaurant We have not seen a you know industry-wide the statistics of the performance for the second quarter So We cannot make a meaningful comparison to others, but I can share with you what we have observed. And we did get some feedback from the leading industry OTAs. And so we have an idea. So we are at least, I think, a better performing group among our peers in terms of the price, occupancy, reservation numbers compared with the same period of last year. And our company has built our strengths to face the challenges both up and down. So when the industry is facing challenges, our main concern is the health and the profitability of our franchisees and also the stable employment environment for our people. So in order to fend off this kind of up and down volatilities, I think the key is how do we increase our core competitiveness? I think that the green tree in the past, especially after the pandemic, we have many aged, older properties that needed to be upgraded. And we have worked with our franchisees in the last one and a half years, and we continue to increase our brand value proposition. And so, in other words, how we can help our franchisees to maintain the revenue or even increase the revenue, meanwhile streamline the operating systems and streamline the operation to reduce the leakage, the waste, and all the cost. So we have built a better supporting system, improved, especially this year. to have a timely and more efficient support to our franchisees. And we also have more focused local sales because everybody is fighting for the national sales. But I think the local sales, the local customers, I mean, this is not only for the restaurant business, for the hotel business as well. And we focus on the local sales and the business development. As a result, we believe our downward trend is like to like and the same, you know, for instance, the same store or like kind of properties. We're not talking about the new, you know, the different composition of the properties. And then we'll be, I think we're performing one of the, you know, better ones in the industry. We're waiting for the other groups to report the numbers. We'll make a detailed comparison. Another effort we've been focusing on is building and also continue to showcase our brand by going, you know, by reposition, by improving our, you know, by our L.O. hotels. You can see from the page, I think page seven to eight in the hotel performance side, our LO hotels, continue to lead the FM hotels in both the raw power and also the occupancy. So as a result that we will transfer, we'll replicate the business practice to the franchisees and the leading the franchisees to face this downward pressure or challenges. So Kevin, that's our focus for the time being. And we're confident that we'll continue to be the most profitable value deliverer to our franchisees, to our businesses.

Okay, that's very helpful. I would like to have two more questions. The second one, again, a follow-up on the hotel industry. I heard that you're going to maintain the plan of opening 480 to 490 hotels throughout the year, but if we look at The second quarter, indeed, is there any special reason for the particularly low number of hotel openings during the quarter? Is it because of competition or franchisee? And at the same time, apart from organic growth, are you also looking for any M&A opportunities?

Okay. Thanks, Kevin. The second quarter, we did have slower, lower number of openings. And for, I think it just happened that some of the scheduled openings getting delayed a little bit, I think is partially because now I think the regulation for opening hotels is a little bit more, I would say, restrictive. And all the required licenses are a little bit harder to obtain than before. So we looked in the pipeline. So we have a number of hotels that takes a little bit longer to obtain. all the licenses okay and we have planned to do a better job in terms of educating our franchisees and to give them a better support in doing so and we have uh looked at the pipeline the next quarter i think we are in third quarter we are going to open 170 plus or minuses and then the first quarter will likely the same speed So the year, we will end up the year with between 480 plus or minus, or even maybe towards 500 level. And so we have the hotel numbers in the pipeline, so we're pretty confident in that. With regard to whether we have other competition in the marketplace, our experience, Kevin said, We want to maintain a quality higher growth instead of just for the numbers sake. And I think standardization, higher quality of the hotels and the products and services. And that is more important to our franchisees, to the long term growth and the profitability of the company. So we want to take a more disciplined approach. And every hotel we open, we want it to be a profitable one and can be sustainable for our franchisees. And so we are not going to be just for growth, for the sake of growth, by growing the numbers. So that's our internal focus. And it's absolutely strictly focused on the franchisee's profitability. And that is our focus. And so even though there may be some competitions, But our core customer space are there and so we're helping them to evaluate the site and do a better design and Build the products at the most most efficient ways and anticipating the future consumers behavior and the requirement that's what we're doing and then with that we think we can earn the confidence and the respect from our customers that we still are proud of our loyalty of our green tree franchisees and that feeling is mutual okay with regard to M&A We have not done an aggressive searching in the M&A opportunities, partially because we had two, which was not so successful. And part of the reason is also because of the pandemic and also the performance guarantee. So it didn't lead to a good result. And so we are going to be more focused on if we do an M&A and we have to find the group with the same culture, with the same focus on the profitability of the franchisees and the team growth and efficient system and operations. And most importantly, their value proposition and the brand proposition has to be complementary to green trees. And at this moment, I think it's a little bit harder to find that we do not want to dilute on our efforts and focus now and to reposition some of our older properties and also build new ones. And in a very short period of time, I think we'll be the leading, we hope, will become the most valued brand by our employees and the customers in the industry. Okay.

Great, great. Thanks, it's very clear. And one final small question about your restaurant business. So it actually is great to see that it has turned profitable in Q1 and now better in the second quarter. So I'd like to know about the company's plan for this business in the future especially in terms of like store openings, like FM store openings, low stores. What's your plan on that? Any potential difficulties you may face? And actually, is there any plan for you to lease or separately lease this restaurant business because it's doing so good?

Okay. Thanks, Kevin. Appreciate it for your praise. And it is a tougher business, and we have spent some time in repositioning our business. We have two of the famous but legendary, also a legacy brand. Both of them are over 20 years old and in I think in our economy if you can survive and still grow and still Be a little bit more, you know profitable after 20 years it's almost a miracle to our team and the one of the reason were able to turn the business around, I think is really to understand that the consumer demand, the traffic pattern, and also the products mixed, and the team efficiency. I think those are the few factors we've been focusing on. And we're especially focusing on the value creation for the restaurant business. So which part of the area that we can create the most value. So to make both Danian dumplings and also Lugang Cafe relevant to our consumers. So we did quite a bit of reposition. I think our team has made a great effort. And we have also... been receiving many inquiries to see whether we want to buy or invest in other restaurant brands. At this moment, I think our transition is still not completely solidified. So we'll take some time to figure out what is the best format, what is the best product mix and value propositions for our customers and for our franchisees. And then we can speed up the restaurant development The worst case scenario is we spend a bunch of or spend the franchisees a bunch of capex. I end up, you know, selling one million, loss 500,000. And that's the area we do not want to get into that. So this year, we still want to be conservative. We planned for about 60 in the beginning of the year, 60 new stores, new restaurants. And we're still trying to target that to open that. It's more in the community, street stores with the right format. And our ADS reduction partially was also due to we shrink, we reduced the footprint, the square footage of those restaurants. And in the long run, we hope that we can grow that into a separate group, separate business, either with a separate M&A with other groups, they can buy us out, or we can have our team to lead a separate spend out to be a separate independent business such as IPO. And at this moment, we are still not, we still do not think that we are capable, we are able to do any kind of M&A in the restaurant business to actually export our business models to other businesses. It's still a tough industry. Service industry, even though it's growing, but it's a tough competition. And we have to be really careful in making those kind of decisions. So those are the areas we welcome any recommendations, and we respect the great operators in the industry. So we wouldn't mind doing multiple different kinds of joint ventures and cooperation with other leading restaurant chains and with leading restaurant groups in order to further enhance our competitiveness in the restaurant side.

Okay, great, great. Very helpful. Thanks for answering my questions.

Thank you. And as a reminder, if you'd like to ask a question, please press star then 1. We'll pause for just a moment to assemble our roster. And once again, ladies and gentlemen, that's star then 1 if you have a question. Our next question today comes from Storm Shu with ABC Capital. Please go ahead.

Hello, management. Thank you for answering my question. And I have one question about the capital markets. Can you comment on how to improve the liquidity in the capital markets? Previously, the company considered several paths. Is there any progress or timeline now? Thank you.

No, no, no, I understand. You know, the storm that I didn't, can you rephrase the second? I know the first question is increase the, how do we plan to increase the liquidity?

Liquidity. And the second question. Yes, in the capital market. The second question is about, yes, because our company considered several paths for the improved liquidity. Is there any progress on the timeline? No.

Timeline for?

Also about the liquidity. Improved the liquidity in the capital market. I see. OK. Got it. Thank you. Thank you.

Okay, got it. Appreciate it. Yes, our shares are pretty concentrated by some of the largest institutional investors. And our corporate company owns about 90%. which is we are in the process of doing a reverse merger and then to we are also after that we plan to interface in the phase the stage and we discuss whether we can systematically do an offering to the outside investors to increase the liquidity stage by stage. The detailed timeline depends on the restructuring, which we hope will be completed any time soon, in the next quarter or so. So that's the market liquidity, which is a major concern for ourselves as well, Storm. So we're taking the concrete plan To do that, meanwhile, we'll continue to focus on, again, our core competition, strength building. And I think as long as we continue to deliver the profitable, sustainable growth and continue to grow the product and services industry, in high quality, standardized, then I think that the long-term value is there for all of our shareholders.

Okay, got it. Thank you.

Thank you. And this concludes our question and answer session. I'd like to turn the conference back over to Selina Yang for any closing remarks.

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

Thank you.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.