H World Group Ltd Q1 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by, and welcome to Huazhu Group Limited First Quarter 2020 Earnings Conference Call. Please be advised that today's conference is being recorded. And I would now like to hand the conference over to Huazhu Group. Please go ahead.

Thank you. Good morning, and good afternoon or good evening depending on where you are in the world, and thanks to all of you for dialing in. Welcome to Huazhu First Quarter 2020 Earnings Conference Call. Joining us today is Mr. Ji Qi, Founder and Executive Chairman of Huazhu Group; Mr. Jin Hui, Huazhu China CEO; Ms. Liu Xinxin, Chief Digital Officer; Yunhang Xie, Chief Strategy Officer; Mr. Teo Nee Chuan, CFO; and Ms. Ye Fei, VP of Strategic Investment. 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 Security 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. A number of potential risks and uncertainties are outlined in our public filings with the SEC. Huazhu Group does not undertake any obligation to update any forward-looking statements, except as required under applicable laws. On the 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 earlier today. As a reminder, this conference call is being recorded. The webcast of this conference call as well as supplementary slide presentation is available in the Investor Relations section of Huazhu Group's website at ir.huazhu.com. Now I will turn the call over to Mr. Qi. Mr. Qi, please.

Good morning, everyone. I would like to start by sharing my thoughts on the industry recovery. Instead of a V shape, the recovery is more like a tick shape due to the widespread COVID-19 and resurgence in some places like Beijing. In China, our recovery is in place with the lifting of travel restrictions and other preventive measures. Although the second wave in Beijing has emerged recently, the possibility of a massive spread is low. We see continued improvement in hotel occupancy under RevPAR. In Europe, Germany is relatively ahead in recovery. Recently, Germany and some European countries have started to stop land border checks and have removed travel restrictions, which will further boost the recovery of the lodging industry there. About 80% of DH hotels have reopened. Local markets have a faster recovery; as we can see on Page 3, based on Huazhu's numbers from 2020. Room nights sold to the local market as a percentage of room nights available has reached the same level as last year and even slightly exceeded it. While the room nights sold to the non-local market as a percentage of room nights available is still catching up, this is also thanks to our strong local sales team. Everyone in this industry is affected. Companies with new business models are under more pressure due to non-standard products. International hotels in China are affected more because of the international travel restrictions. This COVID-19 pandemic is the greatest challenge and also a test for the lodging industry. We are restructuring our organization, mainly in the following four areas: first, streamlining our head office by combining departments and reducing headcount. The head office becomes a platform that provides services to different business units and regions. Second, decentralizing the organization. A dedicated responsibility to regional offices and people at the front line. Third, building a formal talent program to retain young people and give them more opportunity to grow. Fourth, setting up Huazhu China for our China business and Huazhu Group for International. China is our home market and the most important market. We will use Singapore as a base for international expansion.

Hello, everyone. I'm Jin Hui, the CEO of Huazhu China. Before discussing our strategy for 2020, I want to review the recovery of our hotels in China. After a challenging first half of February, we quickly began to reboot our team to ensure the safety of our staff and guests, aiming to keep our hotels operational as soon as possible. By the second quarter, 97% of our hotels had resumed operations. However, due to government preventive measures, border controls, and the second wave of COVID-19 in Beijing, as of June 29, we still had 157 hotels under government requisition. Meanwhile, our occupancy rate is also on a recovery trajectory. During the week of June 14 to 20, our operating hotels saw an average occupancy of 74%, while STR China indicated this number was 47% for the industry comparison. The resurgence of COVID-19 in Beijing since June 11 did negatively affect our operations, but we also observed that the Chinese government responded promptly and thoughtfully to the situation, which keeps us cautiously optimistic. The recovery curve of our RevPAR, shown in our materials, indicates the same-hotel RevPAR in 2020 as a percentage of 2019. As of June 28, our same-store RevPAR has returned to 65% of last year. Moving forward, I will outline our strategic directions for 2020, which focus on three main areas: accelerated quality hotel expansion, building multi-dimensional direct sales capabilities, and establishing a global technology-based shared service platform. Ms. Liu Xinxin, the President of Huazhu China, will join me in sharing further details on these strategies in the next few slides. Regarding our growth strategy, the hotel pipeline chart indicates that despite COVID-19, our pipeline in the first quarter remains at a similar level to last year, slightly exceeding last year's figures. Additionally, we are seeing a clear trend of deeper market penetration into lower-tier cities.

The President of Huazhu China, Ms. Liu Xinxin, will join me to share these three major strategic points in the next few slides. Talking about the growth strategy of our stores. Looking at the chart of the hotel pipeline, we can see that even with COVID-19, the pipeline by the first quarter still remains at the same level as last year, slightly over last year's number. Additionally, there is a clear trend of deeper penetration into lower-tier cities.

Thank you, Jin Hui. Good morning, everyone. I would like to share with you our strategy focused on multi-dimensional direct sales. Let's turn to Page 14. Huazhu has demonstrated strong online direct sales capabilities, particularly during the COVID-19 outbreak. Due to the pandemic and travel restrictions, online customer bookings declined significantly. Contributions from online travel agencies of our total bookings also decreased. As of May 2020, customers booked through online travel agencies were still 4 percentage points lower compared to last year. On the other hand, customers that booked through Huazhu's Central Reservation recorded a sharper rebound, much stronger than the OTAs. As of May 2020, contributions from Huazhu's own Central Reservation exceeded the 2019 level. We also took this opportunity to further strengthen our offline direct sales capabilities. Please turn to Page 15. Our efforts for offline direct sales were channeled through our local on-site sales as well as through our corporate sales initiatives. As Ji Qi mentioned earlier, the local travel market recorded a faster recovery during this pandemic. For local sales efforts, we work to establish relationships with the community, local government, and local enterprises located within a certain geographic radius around our hotels. On the other hand, corporate sales initiatives focused on establishing relationships with our corporate customers; we customized our sales products to meet the needs of customers with different lodging needs. We also created direct booking and settlement IT solutions that can be connected to our B2B corporate customers. All these automation systems enable our corporate customers to book easily based on their staff's different travel budget levels and ease monthly settlement directly with the company, combining hundreds of hotel bills into one single payment per month. The number of our B2B corporate customers grew to more than 300 in June 2020. These corporate accounts include major companies like Haier, the electrical appliance company; Hikvision; and China National Grid, to just name a few.

Thank you, Xinxin, and good morning, everyone. As shown on Slide 20, at the end of Q1, we had a total number of 5,953 hotels with 575,488 rooms in operations, an increase of 31% from the end of 2019. Excluding the 115 DH hotels at the end of Q1, legacy Huazhu recorded a room inventory growth of 26%, with 552,352 rooms at the end of Q1. As mentioned by Jin Hui earlier, the COVID-19 pandemic has had a significant impact on our China business since January '20 and started to impact our DH business in Europe from early March onwards. In order to contain the spread of the pandemic, governments in both China and Europe imposed strict social distancing measures and travel restrictions, which caused a decline in our hotel occupancy. Our system-wide hotel turnover recorded a 32% decline from CNY 7.2 billion in Q1 last year to CNY 4.9 billion this year. Excluding DH, Legacy Huazhu's turnover would have declined by 49% to CNY 3.7 billion. We will have a separate discussion on our blended RevPAR for Legacy Huazhu and DH because the pandemic impacted these two regions at different times. Turn to Page 21. Our blended RevPAR for Legacy Huazhu, excluding hotels under requisitions, declined by 58% to RMB 75 in Q1. The ADR decreased by 15% to RMB 189, and our occupancy decreased to 40% from 81% in Q1 last year. As mentioned by Jin Hui earlier, our weekly average occupancy increased to 74% during mid-June before dropping to 34%, following the resurgence of COVID-19 cases in Beijing. With the recovery of RevPAR in China, we are glad to report that we recorded a positive EBITDA in May.

The next question we have is from the line of Justin Kwok from Goldman Sachs.

Perhaps I'll start with two questions. The first one is about the recovery path of your operations in both China and also in Europe. I guess we already just finished the calendar of Q2, and then we're now just stepping into Q3. So can I get a sense on what you are looking at in terms of the target for both occupancy and room rates into the end of Q2 or into Q3? That's the first question. The other question is about Mr. Qi's earlier comments at the beginning of the call that, you have noticed a very fast recovery of local market demand compared to non-local market demand, and also the challenges that you have already seen with the new business model and international operators in the market. So with that in mind, how would you manage your upcoming new product openings in view of these phenomena?

Okay. Hi, everyone. Jin Hui. I want to discuss the recovery in China first. Our slide shows that the recovery trajectory is healthy. In Q2, the RevPAR of 2020 reached 65% of last year, indicating a positive recovery trend. However, the resurgence of COVID-19 in Beijing has negatively impacted our operations. Nevertheless, we remain cautiously optimistic about future operations as the uncertainty of COVID-19 largely depends on government countermeasures. The government has implemented thoughtful strategies to address the resurgence in Beijing, so we are generally positive about the outlook for our RevPAR recovery, estimating it will reach around 85% of last year’s operations by Q4. The government has also prepared effectively to contain COVID-19. We are confident in their response. Although there is a possibility of resurgence in some areas of China, we are ready for such scenarios.

Justin, to answer your question about Deutsche Hospitality, let me recap that. In Europe, the COVID-19 started to impact us in March. By the end of March and early April, we had closed approximately 90% of our hotels. However, by the end of June, we managed to reopen about 91 hotels or 79% of our portfolio. Our occupancy rose from the lowest point of 13% to 23% at the end of June. The RevPAR also rose to EUR 23.

I also have two questions. The first question is a follow-up regarding recent trends. We noticed the RevPAR after Beijing's small outbreak has declined or decelerated again. Have we seen that trend stabilize, and is there a recovery of that trend, or is it still decelerating? And how does that compare to the situation outside of Beijing? Have you seen traffic pattern changes after that outbreak outside of Beijing as well? My second question is about the cost side. I noticed that in Q1, the overall EBITDA decline is higher than the revenue decline, which suggests that costs are increasing. Can you provide more detail on the one-off items impacting Q1 and the expected forecast for costs in the second quarter?

Beijing is likely the most important business and tourism center city in China. The outflow of travelers from Beijing has resulted in lower occupancy rates, which remain low due to strong preventive measures. This reduces Huazhu's network occupancy by 10%. However, we are observing a slow and gradual recovery of occupancy in Beijing. We believe the situation will improve after this 14-day period.

To address your question on the cost side, as I mentioned in my presentation, several items impacted our EBITDA in Q1. Firstly, we provided a one-off management fee waiver for our franchisees in Q1. The impact of that was approximately CNY 74 million. This was due to hotels located in Hubei and Wuhan and for those that remained opened during the lockdown. Secondly, our cost-saving measures were offset by severance costs which have not yet been reflected in Q1. I'm looking at an approximate saving of around CNY 400 million this year. However, the cost reductions will take time to recognize in our profit and loss accounts. Additionally, we have made provisions for long-term investments not related to core hotel business totaling around CNY 100 million.

So my first question is regarding the numbers. You mentioned your EBITDA has been positive in May. Could you reiterate what will be your breakeven RevPAR for hotels in China, and for DH? What is it for Huazhu hotels and the upscale hotel segment? That will be my first question. After the answer, I'll ask my next question.

The breakeven level of our China business is approximately RMB 131, including tax. For Deutsche Hospitality, the number fluctuates due to uncertainty regarding subsidies we receive for furloughed employees.

Huazhu has been emphasizing the importance of direct sales and high loyalty of members. The B2B sales also supplements our current local sales. We focus on recruiting new members at the lowest cost and encouraging repeat purchases. The B2B sales have already exceeded last year's level, and we continue to strengthen relationships with our business clients.

Ladies and gentlemen, this does conclude our conference for today. Thank you all for participating. You may now disconnect.