Home Inns & Hotels Management's CEO Discusses Q2 2012 Results
David Sun - Chief Executive Officer
Hello, everyone, and thank you for joining us today to discuss our second quarter 2012 results. Since the first quarter of 2011, overall Chinese market experienced low growth post Chinese New Year holiday season. Previously, manufacturing and export dependent geographic [areas] continued to showing unfavorable year-over-year comparison and overall micro economy continued to be weak with no clear sign to recovery.
Facing such deceleration in the operating environment, the company was able to achieve solid overall performance with double-digit organic revenue growth, continued positive integration results at Motel 168, and increased productivity gain on [second] quarter cost. Total revenues for the second quarter increased 60.2% year-over-year to RMB 1.4 billion, including revenues of RMB 377.4 million from Motel 168. Excluding Motel 168, our core business revenues 18.5% to RMB 1.1 billion at the high end of our guidance.
Despite market softness, occupancy rates was still healthy at 92.1% compared with 94% in the same quarter last year. RevPAR of RMB 157 this quarter compared with RMB 153 in the same quarter last year was consistent with changes in market conditions. It is worth to emphasize that 790 mature hotels under Home Inns and Yitel brands that have been in operation for at least 18 months, maintain the same RevPAR of RMB 168 as that in the second quarter last year. This reflects the strength of our core business portfolio to weather economic downturns an! d their potential of resilient growth when the market rebounds.
Secondly, what was also encouraging was that our three Yitel brand hotels that opened in the second half of 2011 are tracking positive ramp up performance quarter-over-quarter and contributing to our total top line growth meaningfully. This adds validation to our product design and market position of this upscale brand and it confirms that effectiveness of our motel brand strategy.
Total revenues for Motel 168 came below our previous guidance due to worse than expected market conditions and accelerated overhaul of the food and beverage operations. About 55% of Motel 168 lease-and-operated hotels are located in the Yangtze Delta region, including Jiangsu and Zhejiang province, with relatively more concentrated manufacturing and export dependability impacted by the overall structural form of the China economy.
Net of this fact however, Motel 168 continued to achieve improvement in occupancy rate without decreasing average daily rates. Second quarter occupancy rate for Motel 168 increased to 80.8% from 70.4% in the first quarter of 2012, and from 74.6% in the second quarter of 2011. Our integration efforts are generating positive results. Meanwhile, we furthered our initiatives to restructure Motel 168 food and beverage operations in the second quarter. Part of the room revenue growth was offset by the sharp reduction in food and beverage revenues. The immediate benefit of such initiative were reduced costs associated with an inefficiently stressful structure of food and beverage operations.
We are in the process of ramping a more profitable food and beverage in line with that of the Home Inns brand. On the development front, we opened a total of 103 new hotels, including 32 new lease-and-operate hotels and 71 new franchised-and-managed hotels, of which six were franchised-and-managed Motel 168 hotels. We are on track to open a total of 330 to 360 new hotels in 2012. At the end of second quarter, we have a robust pi! peline of! 240 fellow hotels contracted or under constructions. Of which, 75 were lease-and-operate hotels and 172 were franchise-and-managed hotels.
Since our rebuilding of development pipeline post-global financial crisis in 2009, we have built a strongest franchise hotel pipeline as of the end of second quarter. We are well prepared to further leverage our proven franchise management program and platforms to maximize our brand value. Franchising is an increasingly important component of our business.
Our membership program continued to strengthen. As of June 30, 2012, the Home Inns group had 9.2 million unique, active non-corporate members. Increase from 4.3 million as of June 30, 2011. 57.8% of room nights were sold to active non-corporate members during the second quarter of 2012. With our integrated member royalty program, our membership will continue to provide a stable revenue base across all our hotel rents.
Looking to the balance of the year, we realistically believe that the market condition will remain challenging yet generally stable at least through the end of 2012. We are reasonably confident in our ability to successfully navigate through the (inaudible) and deliver a stable performance. In addition, we remain vigilant on solid execution. We will continue to focus on what we can control, including Motel 168 integration plan and the cost control mechanism. Motel 168 integration plans is proceeding well and we are transitioning into phase II of the plan.
The foundation work in phase I enabled us to stabilize existing business and prompting operational best practices and arming our people with effective tools and the knowhow. With the sales and marketing platform established, membership program integrated, more than half of the properties completed upgraded, risk and rewards metrics put in to place, we expect phase II integration to be further result driven.
Regarding to cost control, we are limited in ability to increase in selling price systematically due to the s! oft marke! t condition this year. To add to this challenge, particularly labor costs continue to rise. We have initiated cost control measures, including restructuring of the hotel level staffing which are expected to generate benefit in the second half of the year. Our corporate [capital cost] structure continued to be lean and efficient. We had the G&A as a percentage of gross revenue for the total group decrease year-over-year.
As we look beyond 2012, we firmly believe that long-term prospect of China's travel and lodging market remains strong. The near-term focus on integration of our brands, balanced development in lease and franchise business model, strength of our operating efficiency and as the September profit grows, Home Inns group is very well positioned to maximize opportunities that do exist and deliver a solid shareholder value over the long-term.
With that I will turn the call to Huiping.
Huiping Yan - Chief Financial Officer
Thank you, David, and hello to everyone on the call. I am pleased to first discuss our second quarter results and I will then provide guidance for the third quarter. The company has consolidated Motel 168 operations and financial results since October 1, 2011. We are presenting consolidated group numbers in the main body of our earnings release, and business and financial figures exclusive of the Motel 168 are being presented separately in an appendix to the earnings release.
Further, Motel 168 standalone profit and loss information is separately stated in a spreadsheet attached to our earnings release which is available for download for our investors. 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 I will only speak in RMB terms unless specifically mentioned.
For the second quarter total revenues for Home Inns group were RMB 1.45 billion, increasing 60.2% year-over-year. Excluding, Motel 168 t! otal reve! nues were RMB 1.0726 billion, an increase of 18.5% year-over-year. Total revenues from lease-and operated hotels were RMB 1.3 billion representing a 60.7% increase year-over-year. Excluding Motel 168 total revenues for leased-and-operated hotels were RMB 940.5 million, an increase of 16.2% year-over-year. Total revenues from franchised-and-managed hotels were RMB 149.7 million representing a 55.9% increase year-over-year. Excluding Motel 168 total revenues from franchised-and-managed hotels were RMB 132 million, an increase of 37.5% year-over-year.
Total operating cost and expenses were RMB 1.24 billion. Total operating expenses excluding share-based compensation and integration costs were RMB 1.19 billion, representing 82.4% of total revenues compared with 76% for the same quarter a year ago and 93.2% for the first quarter of 2012. The year-over-year increase in this cost and expense ratio was mainly due to overall market condition and the inclusion of Motel 168 operations which is at a less efficient cost ratio.
Total leased-and-operated hotel costs excluding share-based compensation expenses and integration cost, were RMB 1.1 billion representing 84.3% of the leased-and-operated hotel revenues compared to 77.5% of leased-and-operated hotel revenues in the same period of 2011, and 95.8% in the first quarter of 2012. The increase in this cost ratio was mainly driven by overall soft market conditions and absence of systematic price increases, less efficient cost structure of Motel 168 consolidated this year, and increase in personal costs.
Excluding Motel 168, total leased-and-operated hotel cost excluding share-based compensation expenses was RMB 769.4 million, representing 81.8% of the leased-and-operated hotel revenues compared to the 77.5% for the same quarter in 2011. The year-over-year increase in its expense ratio was due to soft market condition and personal cost increases without system managed price increases to offset. Excluding share-based compensation expense, personal ! cost of f! ranchised-and-managed hotels were RMB 30.3 million representing 20.2% of franchised-and-managed hotel revenues compared to 17% for the same quarter in 2011, and 16% for the first quarter of 2012.
This year-over-year increase in the expense ratio was mainly due to Motel 168 with relatively lower franchised-and-managed hotel revenue base. The sequential increase in this ratio was also resulting from base pay adjustment and performance bonus accruals in Motel 168, in order to align its cost structure with rest of the group. Excluding Motel 168, increasing in franchised-and-managed hotel personal cost year-over-year are in line with increase in the number of franchised-and-managed hotel numbers.
Excluding share-based compensation expense and integration cost, sales and marketing expenses were RMB 15.1 million, representing 1% of total revenues compared to 1.4% of total revenues in the first quarter of 2012. General and administrative expenses excluding share-based compensation expenses and integration cost were RMB 53.1 million or 3.7% of total revenue compared to that of 5.1% of total revenue in the same quarter of 2011, and 4.2% in the first quarter of 2012. The company continues to benefit from economies of scale. The above resulted in an income from operations excluding share-based compensation expenses and integration costs of RMB 170.4 million or 11.8% of total revenues, compared to RMB 158.8 million or 17.5% of total revenues in the same period of 2011, and RMB 9.7 million or 0.8% of total revenue in the first quarter of 2012.
The year-over-year increase in the ratio of income from operations over total revenues was mainly caused by higher cost ratio in Motel 168 and an increase in personal cost while relatively soft market conditions were not conducive for systematic selling price increases, which would otherwise offset costs inflations. The sequential decrease in its ratio was mainly due to seasonality. Adjusted EBITDA was RMB 331.6 million or 22.9% of total revenues compared t! o RMB 165! .9 million or 13.2% of total revenues in the first quarter of 2012, of which number Motel 168 was not included then.
Excluding Motel 168, adjusted EBITDA was RMB 274.3 million or 25.6% of total revenue compared to RMB 247.5 million in the same period of 2011 or 27.3% of total revenues in the second quarter of 2011. Adjusted net income attributable to Home Inns group shareholders was RMB 108.5 million for the second quarter, which included an adjusted net income from Motel 168 of RMB 8.2 million. Adjusted diluted earnings per ADS for the second quarter of 2012 were RMB 2.17 yuan or $ 0.34 in U.S. dollars.
During the second quarter the company generated a net operating cash flow of RMB 259.3 million compared to RMB 254.3 million in the same quarter 2011. Capitalized expenditures for the second quarter were RMB 224.5 million and related cash paid for capital expenditures during the quarter was RMB 134.5 million. As of June 30, 2012, Home Inns group had cash and cash equivalent of RMB 1.01 billion. The outstanding balance of its convertible bonds issued in 2007 was RMB 113.3 million, including principal and accrued interest.
Outstanding balance of long-term financial liability measured at fair value arose of from the convertible bonds issuance in 2010 December was RMB 997.7 million. The balance of U.S. dollar denominated four-year term loan facility decreased to RMB 917.1 million as the company had paid down US$ 95 million during the second quarter of 2012.
Now moving on to our outlook. As David mentioned earlier, while we do not anticipate a meaningful improvement in the overall market, we expect market conditions to remain relatively stable. Further taking into consideration of Motel 168's current performance trend in light of the prevailing market conditions, we are revising our full year revenue guidance for Motel 168. Revenue guidance for the full year excluding Motel 168 remains unchanged.
For the full year, total revenue for Home Inns group are expected to be in! the rang! e of RMB 5715 million to RMB 5810 million. Previously guided total revenues for Home Inns group were in the range of RMB 5815 million to RMB 5910 million. Total revenues for the Motel 168 brand for the full year are expected to be in the range of RMB 1475 million to RMB 1500 million. Previously guidance total revenues for Motel 168 were in the range of RMB 1575 million to RMB 1600 million. Excluding Motel 168, total revenues for the full year of 2012 remain unchanged to be in the range of RMB 4240 million to RMB 4310 million.
Our revenue guidance for the third quarter of 2012. The Home Inns group expects its total revenue from the third quarter of 2012 to be in the range of RMB 1545 million to RMB 1575 million. Total revenues for Motel 168 brand in the third quarter are expected to be in the range of RMB 390 million to RMB 400 million. Excluding Motel 168 total revenues in the third quarter of 2012 are expected to be in the range of RMB 1155 million to RMB 1175 million. These forecasts reflect Home Inns group's current preliminary review which is subject to change.
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