Home Inns & Hotels Management's CEO Discusses Q4 2012 Results

Source: Seeking Alpha Home Inns & Hotels Management Inc. (HMIN) Q4 2012 Earnings Call March 11, 2013 David Sun  CEO Thanks, Johnny. Hello, everyone, and thank you for joining us today to discuss our fourth quarter and the full year 2012 results. Despite the continued weakness in economy and the rising operation costs, the company delivered a solid performance and achieved important milestone in the fourth quarter and in the full year of 2012. We exceed our unit growth target of 330 to 360 new hotels opening for the year, driven by strong growth from franchised-and-managed hotels. We achieved our overall revenue growth target with strong performance by mature hotels. We made further operating improvements through the integration of Motel 168 portfolio in the fourth quarter and achieved 9.7% increase in RevPAR year-over-year. We finalized planning of Yitel hotel including design specification, return of investment framework and a prudent expansion plan. We benefit from the cost control initiatives implemented in early part of the year and saw meaningful cost productivity gains on the hotel personnel cost as well as on corporate G&A expense. At times of market challenges, the company rely on its solid business fundamentals and the management disciplines to focus our execution of some business strategies. We are well prepared to embark on a new era of sustainable, profitable growth to capture the long-term perspective of Chinese economy. Turning to more specifics, let us first look at our financial results. Total revenues increased 11.9% year-over-year to RMB 1.47 billion for the fourth quarter and increased 45.7% to RMB 5.77 billion for the full year of 2012. This was within our guidance range of RMB 5.72 billion to RMB 5.81 billion. RevPAR for the core business of Home Inns and Yitel Hotels was RMB 143 in the fourth quarter compared to RMB 153 in the same period of 2011. While the occupancy rate for this group of hotels was still resilient at 85.6% in the fourth quarter compared to 88.4% last year. ADR was down at RMB 166 to RMB 173 in the fourth quarter of 2011. The decline was mainly due to the relatively slower ramp up progress by the hotels located in the low tier cities before they reach maturity. Markets in low tier cities that there will be less developed experience, more challenges during the overall soft economy, whilst reaching maturity. However, hotel in low-tier cities are able to maintain steady performance. There are 919 core Home Inns hotels that were in operation for at least 18 months phase during the fourth quarter of 2012. They were able to maintain a flat ADR at RMB 172 year-on-year in the fourth quarter of 2012 while holding a high occupancy rate of 90.4%, down only 1.1 percentage points from 91.5% in the same period of 2011. We continue to see positive trend of improvements at Motel 168. In the fourth quarter of 2012, Motel 168 increased RevPAR by RMB 11 year-over-year to RMB 124 as a result of improvements in both occupancy rate and ADR. For the fourth quarter and in full year of 2012, the increasing – the increase in room revenues were offset by a sharp decrease in food and beverages, given our concentrated efforts to eliminate large scale and the non-profitable restaurant operations. Food and beverage revenues will be maintained at current level of around 4% of total revenues going forward. Even so, total revenues from Motel 168 were slightly below expectations for the year. We are pleased with the momentous improvements. We expect further RevPAR expansions in the final stage of integration in 2013, particularly benefiting from the conversion to dual-branding operations at large scale Motel 168 locations. The cumulative results for the complete conversion so far have shown double-digit improvements in the combined RevPAR. The company passed for a total of approximately 30 of these dual-brand operations to gradually come align by the end of the second quarter of 2013 in time to take advantage of favorable seasonality. Some of these conversions were included operations under the Yitel brand given the suitable property requirements and local marketing condition. Speaking about Yitel hotel. At the end of 2012, we had a total of seven Yitel hotels, eight operation including one and a franchise model. After extensive research design fine tune and further revisions based on actual result of execution, we have complete fundamental design work of Yitel brand taking into the consideration of the market potential. Capital requirements at profitability impact. We have also carefully rule out the prudent expansion plan focusing on quality. We plan to open another 8 to 10 Yitel hotels in 2013 including four to five locations beyond the dual-branding convention of existing Motel 168 locations. Variance of Yitel portfolio in five years will contain a healthy mix of finished models utilize our core competencies of chain hotels management without relying a large capital investment. The mix shift towards non-capital high margin franchise business model has already taken place at our economy brands. By the second quarter of 2012, the total number of franchise and management hotels surprised at the leased-and-operated hotels by the first time in our growth histories. At the end of the year, about 55% of our hotels were franchised based and 170 out of total of 241 hotels pipeline for 100 – for 2013 were franchised and managed contracts. It is worth emphasizing that all of this does not happen overnight. We spent years to cultivate strong alliance with our franchise partners to gain their trust with our operational philosophy and proven execution. We mean they are loyalty with increasing value of our brands. Prospective their investment with strength and quality control framework. We have one of the best-run franchised and managed hotels program and we intend to capitalize on this competitive advantage to support our further growth. So let's now talk about new hotels development. For the full year of 2012, we exceed our new hotel opening guidance and opened 366 new hotels, adding 109 new leased-and-operated hotels and 257 new franchised-and-managed hotels. Our new hotels opening schedule was normal at the basis of our robust pipeline at the end of 2012. We expect to maintain a similar level of new hotels opening and open 360 to 380 new hotels in 2013 including approximately 80 to 90 leased-and-operated hotels and 270 to 300 franchised-and-managed hotels. Meanwhile, we will continue to active manage our frequent guest program to maintain the consistent revenue base. As of December 31, 2012, our frequent guests program had a record high of 11.9 million unique active non-corporate members, up from 10.6 million as of September 30, 2012. The contribution from the members is always above 50%. Moving into 2013, we are hopeful that the economy will improve and we are equally aware that meaningful improvements may still be a few months away. Nevertheless, we believe that Home Inns Group have the right strategies and a strong base fundamentals to capture growth opportunity and to deliver a continued long-term success. Our focus remain our sustainable profitable growth, achieve balance – achieving balance in top line growth as well as margin expansion. We are well positioned to achieve this goal even the following. One, return of the normal market condition so that we can and increase price consistently to offset rising cost. Two, well established and a stable low price – lower-tier positioning to capture the growth prospects. Three, as high as 80% to 85% of new – of our new hotels under the franchised-and-managed model operating our proven operational framework. Four, the successful conclusion of Motel 168 integration and further demand of this brand to increasing our existing market penetration. Five, a sensible pace of expanding into mid-scale marketing, we strengthened Yitel brand. And six, continue cost control and productivity focus to achieve leverage and economies of scale as we grow. We strongly believe that recovery in the Chinese economy is not a matter of is but when. The company is well prepared to take advantage of this recovery when it arrives. We are excited about years ahead as Home Inns group maintains its leadership position in the China economic hotel sector and the delivery long-term value for our shareholders. With that, let me turn the call over to Huiping who will walk us through the financials for fourth quarter and full year of 2012. Huiping? Huiping Yan- CFO Thank you, David. And hello to everyone on the call. I'm pleased to first discuss our fourth quarter and full year 2012 results and then provide our guidance for the first quarter and full year of 2013. As a reminder, the company has consolidated Motel 168's operation and financial results since October 1, 2011. We have presented consolidated group numbers in the main body of our earnings release. Business and financial figures exclusive of Motel 168 are being presented separately in an appendix to the earnings release. Financial data for the group and exclusive of Motel 168 are also presented in spread sheets attached to our earnings release which is available for download from our Investor Relations website. On this call, I will review group financial results as well as selective non-Motel 168 information to provide more context. As I take you through the numbers, please note that I will only speak in RMB terms unless specifically mentioned. We delivered steady revenue growth in the fourth quarter and our group revenues were in line with our annual target. For the fourth quarter, total revenues for Home Inns Group were RMB 1.47 billion increasing 11.9% year-over-year. Excluding Motel 168, total revenues for the fourth quarter were RMB 1.1 billion, an increase of 16.8% year-over-year. For the full year, total revenues for Home Inns Group were RMB 5.77 billion increasing 45.7% year-over-year. Excluding Motel 168, total revenues for the full year were RMB 4.3 billion, an increase of 19.7% year-over-year. The increase in revenues were mainly volume-driven from the increased in the number of hotels in operation. Total revenues for leased-and-operated hotels for the fourth quarter were RMB 1.3 billion representing a 10.5% increase year-over-year. Excluding Motel 168, total revenues from leased-and-operated hotels for the fourth quarter were RMB 959.7 million, an increase of 15.7% year-over-year. For the full year 2012, total revenues from leased-and-operated hotels were RMB 5.16 billion, representing a 45.1% increase year-over-year. Excluding Motel 168, total revenues from leased-and-operated hotels for the full year were RMB 3.77 billion, an increase of 17.4% year-over-year. Total revenues from franchised-and-managed hotels for the fourth quarter were RMB 160.7 million, representing a 24.8% increase year-over-year. Excluding Motel 168, total revenues from franchised-and-managed hotels for the fourth quarter were RMB 140.9 million, an increase of 25.3% year-over-year. For the full year of 2012, total revenues from franchised and managed hotels were RMB 604.9 million, representing a 51.2% year-over-year. Excluding Motel 168, total revenues from franchised and managed hotels for the full year were RMB 534.1 million, an increase of 39.2% year-over-year. Again, as mentioned, the increase in revenues were volume-driven and further, as David discussed earlier, even though we experienced slower hotel ramp up towards maturity in relatively weaker markets, our mature hotel group demonstrated resilience in top line performance and supported the group's achievement on its overall revenue target. Total operating cost and expenses were RMB 1.34 billion for the fourth quarter. Excluding share-based compensation expenses and integration cost, total operating cost and expenses for the quarter were RMB 1.3 million, representing 88.6% of total revenues compared to 87.8% in the same period of last year. For the full year of 2012, total operating costs and expenses were RMB 5.16 billion. Excluding any share-based compensation expenses and integration costs, total operating costs and expenses for the full year were RMB 4.97 billion representing 86.1% of total revenues compared to 82.2% in 2011. The increase in total operating costs and expenses as a percentage of total revenues for the fourth quarter and the full year of 2012 were mainly due to overall soft market conditions plus our systematic price increases and rising operating costs net of cost productivity gains on hotel personnel costs and corporate G&A. The increase in this ratio for the full year was also driven by a higher cost ratio from Motel 168 with one quarter of results consolidated in 2011 compared to four quarters of results consolidated in 2012. Total leased and operated hotel costs excluding share-based compensation and integration costs for the fourth quarter were RMB 1.19 billion representing 91.0% of leased and operated hotel revenues compared to 88.9% of leased and operated hotel revenues in the same period of 2011. For the full year of 2012, total leased and operated hotel costs excluding share-based compensation expenses and integration costs were RMB 4.55 billion representing 88.1% of leased and operated hotel revenues compared to 82.7% of the leased and operated hotel revenues in 2011. The year-over-year increase in this ratio for the fourth quarter and full year of 2012 were largely due to recurring revenue base due to market softness, the absence of systematic price increases, rising operating cost including energy and personnel cost not fully absorbed by productivity initiative. A year-over-year increase in this expenses ratio for the full year was also driven by a higher cost ratio from Motel 168. These results were consolidated starting fourth quarter of 2011. Excluding share-based compensation expenses, labor cost of leased-and-operated hotels increased 9.2% which is below the growth rate of leased-and-operated hotel revenue growth in the fourth quarter. The labor cost productivity programs implemented in early part of 2012 is generating positive result. Excluding share-based compensation expenses, personnel cost of franchised-and-managed hotels for the fourth quarter were RMB 22.1 million or 13.8% of franchised-and-managed hotel revenues. This compared to 14.3% for the same quarter in 2011. For the full year of 2012, excluding share-based compensation expenses, personnel cost of franchised-and-managed hotels were 11 – RMB 115.5 million or 19.1% of franchised-and-managed hotel revenues compared to 17.2% in 2011. The increase in personnel cost of franchised-and-management hotels were in line with the increase in the number of franchised-and-managed hotels. Excluding share-based compensation expenses, sales and marketing expenses for the fourth quarter of 2012 were RMB 24.4 million representing 1.7% of total revenues compared to 1.5% of total revenues in the same period of 2011 and 1.1% of total revenues in the third quarter of 2012. In this expense ratio was mainly due to higher non-recurring spending on marketing programs in the quarter to support Home Inns multi-brand strategy. The company continued to rely largely on effective but simple sales and marketing practices to support its revenue growth. For the full year of 2012, excluding share-based compensation expenses and integration costs, sales and marketing expenses were RMB 75.3 million representing 1.3% of total revenues compared to 1.3% of total revenues in 2011 excluding the one-time adjustment due to change in accounting estimates. In other words, the sales and marketing expenses for the company continue to be managed and controlled. General and administrative expenses excluding share-based compensation expenses and integration cost was RMB 65.2 million or 4.5% of total revenues compared to 4.7% of the total revenues in the same period 2011. For the full year, general and administrative expenses excluding share-based compensation expenses and integration costs was RMB 228 million or 4% of total revenues compared to 5% in 2011. The year-over-year decrease in this expense ratio in the fourth quarter and full year came as a result of effective cost control and productivity enhancement. The company continues to benefit from discipline and economies of scale. All discussed above resulted in an income from operations excluding share-based compensation expenses and integration cost for the fourth quarter of 2012 of RMB 79.2 million or 5.4% of total revenue compared to RMB 78.5 million or 6% of total revenue in the same period 2011 and RMB 204.7 million or 12.8% of total revenue in the third quarter of 2012. For the full year of 2012, income from operations excluding share-based compensation expenses and integration cost was RMB 464.1 million or 8% of total revenue compared to RMB 457.3 million or 11.5% of total revenues in 2011. Provided that the market condition improve in the future the company is prepared to improve further profitability to price restoration, price increases systematically, further productivity gain and margin lift with increased portfolio mix towards franchised-and-managed hotels. Adjusted EBITDA for the fourth quarter of 2012 was RMB 260.5 million or 17.8% of total revenues compared to RMB 227.4 million or 17.4% of total revenue in the same period of 2011. For the full year 2012, adjusted EBITDA was RMB 1.13 billion or 19.6% of total revenue compared to RMB 900.2 million or 22.7% of total revenues in 2011. Adjusted net income attributable to Home Inns Group shareholders was RMB 80.6 million for the fourth quarter of 2012 compared to RMB 36.6 million in the same period of 2011. And the adjusted net income of RMB 135.8 million in the third quarter of 2012. Adjusted diluted earnings per ADS for the fourth quarter were RMB 1.74 or $0.27. For the full year of 2012, adjusted net income attributable to Home Inns shareholders were RMB 300.3 million for the full year compared to adjusted net income of RMB 326.1 million in 2011. Adjusted diluted earnings per ADS for the full year were RMB 6.62 or $1.06. Both adjusted income from operations and adjusted EBITDA as a percentage of total revenue decreased slightly year-over-year, which is consistent with market conditions not suitable for systematic price increases which could then offset rising operating costs. During the fourth quarter, the company generated a net operating cash flow of RMB 186.8 million compared to RMB 139.5 million in the same quarter of 2011. Capitalized expenditures for the fourth quarter of 2012 were RMB 250.4 million while related cash paid for capital expenses during the quarter was RMB 305.6 million. For the full year 2012 net operating cash flow was RMB 716.9 million compared to RMB 726.1 million in 2011. Capitalized expenditures for 2012 were RMB 1 billion while related cash paid for capital expenditures during the year was RMB 958.1 million. As of the end of 2012, Home Inns Group had cash and cash equivalent of RMB 663.2 million. Financial liabilities of RMB 1.07 billion consisted of the outstanding balance of long-term financial liabilities for convertible notes issued in 2010 December, and interest swap contracts both measured at fair value. The balance of U.S. dollar denominated four-year term loan facility was RMB 748 million. The company redeemed the outstanding convertible bonds issued in 2007 in the fourth quarter of 2012 and reduced its term loan balance ahead of the required pay down schedule. With strong cash generated underlying operation in a stable capital commitments planned for leased and operated hotels at a reduced number, the company expect to self fund future expansion and continue to reduce debt load. Turning to our outlook, as David mentioned earlier, we are hopeful that a market recovery will happen even though it may still be months ahead. We will remain focused on profitable expansion and rely on our internal readiness to take advantage of the market recovery and capture long-term opportunities in Chinese economy and the travel and lodging industry. With respect to our expectations for the year. We plan to open 360 to 380 new hotels in 2013 including approximately 80 to 90 leased-and-operated hotels and 270 to 300 franchised-and-managed hotels. Total revenues for Home Inns Group for 2013 are expected to be in the range of RMB 6,600 million to RMB 6,800 million representing a growth of 14.4% to 17.9% over 2012. Total revenue for the group in the first quarter of 2013 are expected to be in the range of RMB 1,385 million to RMB 1,415 million. Total revenues from Motel 168 brand for 2013 are expected to be in the range of RMB 1,650 million to RMB 1,700 million. Total revenues for Motel 168 brand in the first quarter are expected to be in the range of RMB 330 million to RMB 340 million. Excluding Motel 168, total revenues for 2013 are expected to be in the range of RMB 4,950 million to RMB 5,100 million. Excluding Motel 168, total revenues in the first quarter of 2013 are expected to be in the range of RMB 1,055 million to RMB 1,075 million. Please note that above forecasts reflect the company's current and preliminary view which are subject to change. We have covered a great deal of territory today, so before I open the call for questions, I think it's worth taking a moment to summarize key takeaways for 2012. Our performance in the year are reasonably satisfactory given market conditions. We met our annual revenue expectation and exceeded our targets for new hotel openings. We focused on profitable growth within optimal new hotel opening schedule and diversification in business model. Our mature hotels remained resilient and delivered solid performance given a soft environment. Motel 168 integration is well on track and we expect to conclude the integration in 2013. We placed a heavy emphasis on franchised and managed hotel growth to minimize investment and maximize profitability in a challenging market. Our cost control and productivity measures generated positive impact to protect margin despite limited pricing opportunities. In short, in 2013, we will continue to focus on further developing our low-capital, high-margin franchise business, complete Motel 169 integration, scale up our Yitel profitability and continue effective cost control initiative. We are excited about the long-term opportunities before us and we are confident that the underlying fundamentals of our business are stronger than ever. It will support and maintain our clear market leadership position well into the future and will enable us to deliver enhanced shareholder value over the long term. from China Travel & Tourism News http://www.chinatraveltourismnews.com/

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