Hyatt Hotels Corporation (NYSE:H) Q2 2023 Earnings Call Transcript

Hyatt Hotels Corporation (NYSE:H) Q2 2023 Earnings Call Transcript August 3, 2023

Hyatt Hotels Corporation misses on earnings expectations. Reported EPS is $0.82 EPS, expectations were $0.83.

Operator: Good morning, and welcome to the Hyatt Second Quarter 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers presentation, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Joan Bottarini, Chief Financial Officer. Thank you. Please go ahead.

Joan Bottarini: Thank you, and good morning. Welcome to Hyatt’s Second Quarter 2023 Earnings Call. Before we begin, I’d like to take the opportunity to welcome Adam Rohman who is now leading our Investor Relations and Global Financial Planning and Analysis teams. Adam has been with Hyatt for 19 years and has deep knowledge of the company most recently overseeing Hyatt’s global asset management team. I’d also like to recognize Noah Hoppe who over the past three years has been instrumental leading Hyatt’s Investor Relations and global FP&A teams. I’m excited to share that Noah has transitioned to a new role joining our transactions team and supporting our growth strategy. With that I’ll turn the call over to Adam.

Adam Rohman: Thank you for the warm welcome Joan. Joining me on today’s call are Mark Hoplamazian, Hyatt’s President and Chief Executive Officer; and Joan Bottarini, Hyatt’s Chief Financial Officer. Before we get started, I would like to remind everyone that our comments today will include forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our annual report on Form 10-K quarterly reports on Form 10-Q and other SEC filings. These risks could cause our actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the earnings release that we issued today along with the comments on this call are made only as of today and will not be updated as actual events unfold.

In addition, you can find a reconciliation of non-GAAP financial measures referred to in today’s remarks on our website at hyatt.com under the Financial Reporting section of our Investor Relations link and in this morning’s earnings release. An archive of this call will be available on our website for 90 days. With that I’ll turn it over to Mark.

Mark Hoplamazian: Thanks, Adam and it’s great to have you in your new role.

Adam Rohman: Thank you.

Mark Hoplamazian: Good morning, everyone. For the fifth consecutive quarter, we posted record results demonstrating our unique positioning and continued momentum. In the second quarter, adjusted EBITDA plus net deferrals and net finance contracts was up 7% compared to the second quarter of 2022 and up 48% compared to the second quarter of 2019. This is an especially notable achievement when you consider that we’ve sold $2.3 billion in real estate net of acquisitions since the beginning of 2019. Our ongoing transformation has significant momentum and the second quarter results continue to reinforce our confidence in executing the strategy we outlined at our Investor Day in May. During our Investor Day we highlighted Hyatt’s transformation positioning the company as the preferred brand for high-end guests in each segment that we serve, while creating significant value for shareholders.

Since the beginning of 2017, we’ve driven shareholder value by realizing proceeds of $3.8 billion from the sale of owned hotel real estate, net of acquisitions at a multiple greater than 16 times, acquired $3.7 billion of asset-light and fee-based platforms at a multiple of approximately 8x and returned over $2 billion to shareholders through common stock repurchases and dividends. We’ve experienced meaningful growth doubling our luxury rooms, tripling our resort rooms and quadrupling our lifestyle rooms. As a result, today we are more fee-based and asset-light with a much higher conversion of reported earnings to cash flow. We anticipate that substantial free cash flow from our increased asset-light earnings mix. In addition, the proceeds from asset dispositions will enable us to invest in growth, return capital to shareholders and maintain our investment-grade profile.

Through the disciplined execution of our strategy we have outlined a path where we expect to achieve $750 million in free cash flow and an 80% asset-light earnings mix by 2025. Our asset-light fee-driven model combined with industry-leading net rooms growth demonstrates our earnings strength and durability. We also expect to significantly reduce our capital expenditures to a run rate of approximately $100 million by 2025. The journey to transform our earnings profile is well underway and we are confident in our ability to execute the strategy and achieve the long-term projections that we outlined at our Investor Day. The successful execution of our strategy has led to a significant growth of the World of Hyatt program, which added seven million new members in the past 12 months, an increase of 20%.

And we continue to see strong enrollments at our ALG properties that have signed up over 650,000 new loyalty members since the launch in May of 2022. Additionally, Legacy Hyatt system-wide rolled of Hyatt room penetration increased 140 basis points in the first half of 2023 compared to the same period in 2022. To further deepen loyalty with our existing World of Hyatt members and attract new members, we announced several key initiatives this quarter. First, the announcement of Hyatt Studios our first Upper midscale brand in the Americas has been well received by our ownership community. Letters of interest for over 100 hotels have begun converting to signed contracts and we expect the first property to open in the second half of 2024. Second we completed the acquisition of Mr & Mrs Smith a global travel platform that enhances our luxury offerings and provides access to a collection of more than 1500 boutique and luxury properties across the globe with the concentration in Western Europe.

We have seen the power of leveraging an effective distribution platform in a complementary segment with ALG vacations and we plan to enhance the value proposition for the owners of hotels represented on the Mr & Mrs Smith platform, while also expanding the choices for our members and guests. Third we successfully integrated Lindner Hotels in Europe and Dream Hotel Group into the World of Hyatt loyalty programs strengthening our lifestyle portfolio. The speed of integration of these two platforms enables us to deliver value quickly for our owners and guests. These strategic initiatives demonstrate our commitment to deliver unique experiences, expand our global presence and strengthen our role of Hyatt loyalty program. Moving to our latest business trends.

I’m pleased to share the comparable system-wide RevPAR for the second quarter increased 15% compared to the second quarter of 2022 and 8% compared to the same period in 2019 for the same set of comparable properties. Average rates increased 5% compared to a very robust second quarter of 2022 and are 15% higher compared to the second quarter of 2019 for the same set of comparable hotels on a constant currency basis respectively. Additionally, occupancy contributed meaningfully to RevPAR growth in the second quarter increasing 660 basis points compared to the same period last year. The second quarter reached a post-pandemic record with absolute occupancy of 72%, which is below 2019 levels by 450 basis points. Average daily rates remain strong and we believe occupancy gains will continue to drive future growth.

Turning to our customers. Leisure transient revenue growth sustained in the second quarter increasing 7% compared to the second quarter of last year. These results are particularly impressive considering the pent-up demand that drove very strong results in the second and third quarter of 2022 due to Omicron’s impact. While the year-over-year growth has moderated compared with the first quarter of this year, overall results in the second quarter continue to be very strong as we anticipated. Compared to the second quarter of 2019, leisure transient revenue increased by 26% in the second quarter, a 200 basis point improvement from the growth that we realized in the first quarter of this year compared to the — continue to prioritize travel. We’re also pleased to see the recovery in business transient revenue continuing to gain momentum up 36% compared to the second quarter of 2022 and 86% recovered to the second quarter of 2019.

Led by large corporate accounts in the Americas, the recovery accelerated during the quarter with May and June 90% recovered when compared to the same months in 2019. Group revenue in the quarter was up 14% compared to the second quarter — 2019 even though room night demand was down 12%. From a geographic perspective, we continue to see recovery momentum in Asia Pacific and strong results in the rest of the world. Greater China RevPAR surpassed pre-pandemic levels for the first time up 6% in the second quarter. Markets traditionally dependent on international inbound travel integrator China like Shanghai and Shenzhen were below second quarter 2019 levels, but have shown meaningful improvement compared to the first quarter of this year. Outside of Greater China, performance in Europe was outstanding as RevPAR increased 23% compared to the second quarter of 2022 and was up 30% compared to the same period in 2019.

Finally, RevPAR in the United States remains resilient, increasing 4% compared to the second quarter of 2022 and remains above 2019 levels. Turning to ALG. Comparable net package RevPAR increased — 18% in the first half of 2023. This quarter marks the one-year anniversary of the introduction of the World of Hyatt at ALG Resorts in the Americas, and we are thrilled to see strong adoption by our world of Hyatt members. In the Americas, World of Hyatt members accounted for approximately 22% of room nights at ALG Resorts during the first half of the year. As we look to the rest of 2023, we expect net package RevPAR growth to moderate in the second half of the year, relative to the second quarter, as a result of lapping extremely strong results in the second half of 2022 due to the condensed leisure travel season last year.

Gross package revenue for the second half of 2023 is pacing 8% ahead of 2022. Turning to Group Pace for the Americas full service managed properties. Group revenue was up 31% in the first half of 2023, and Pace for the second half of 2023 is up 8% compared to the same periods in 2022. We had an extremely strong quarter booking nearly $500 million in the Group business for all future periods, an increase of 36% to the second quarter of 2022 and this was the highest Group production quarter since the first quarter of 2019. We’re seeing the booking window lengthening, with approximately two-thirds of group production booked for dates beyond 2023 setting us up for strong opportunities to yield rates into the future. For 2024, specifically, group pace is up 10% with average rates and room nights each up approximately 5% and I’m extremely excited about the future, as group room night demand continues to recover back to 2019 levels.

The combination of group production trends and 2024 Group Pace, reinforces our confidence to achieve the illustrative RevPAR growth range that we provided during our Investor Day in May. In summary — we’re benefiting from the tailwinds from Greater China sustained demand for leisure travel, recovery of business transient travel and strong sustained demand for groups and events. We believe the combination of our commercial platforms and best-in-class hotel teams is driving higher loyalty preference, hotel profits and as a result, increasing owner preference. The growth in our footprint and pipeline is the direct outcome of owners preferring our brands. During the second quarter, we achieved an impressive 6.9% net rooms growth over the trailing 12-month period.

Notably, conversion opportunities remained a significant contributor to our net rooms growth this quarter. We introduced the Impression by Secrets brand, to the inclusive collection this quarter, an ultra luxury brand that further solidifies our position, as the largest manager of luxury all-inclusive resorts in the world, including the newly opened Impression Isla Mujeres by Secrets in Mexico. For our Legacy Hyatt portfolio, we expanded our presence in key cities like London and Mexico City, while also adding luxury offerings with the openings of Andaz Nanjing Hexi in China and the Grand Hyatt La Manga Club Golf & Spa in Spain. Our pipeline reached a new record of 119,000 rooms representing a 5% increase year-over-year and up sequentially from the first quarter, with new signings outpacing new openings.

The expansion of our pipeline and ability to convert existing hotels to our brand gives us confidence we will continue to realize outsized growth into the future. I want to provide an update on our real estate transactions. We continue to make progress on two assets that we currently have on the market for sale and we expect to be under contract for one asset and select a buyer for the other asset soon. We remain focused on realizing the most attractive valuations and securing durable long-term management or franchise agreements. And we continue to remain highly confident in our ability to achieve our $2 billion sell-down commitment by the end of 2024. Lastly, I’m pleased to report continued to remain progress on World of Care, which drives alignment across Hyatt and how we advance care for the planet people and responsible business to support thriving destinations around the world.

We just published our 2022 World of Care report this week and our global teams are advancing care for the planet through continued actions towards our 2030 environmental goals that address carbon reduction, water conservation and responsible sourcing. Our hotel teams are bringing innovative solutions to meet these goals such as our 2022 Food Waste Reduction pilot program and adoption of 100% Renewable Electricity in US Hyatt-owned hotels. In connection with advancing care for people, we believe that our teams should reflect the diversity and experiences of the communities in which Hyatt operates hotels. And we continue to support that diversity in leadership positions across our workforce. We have also exceeded our 2025 goal for expansion of our spend with diverse suppliers and identified new opportunities to support businesses in underinvested communities through efforts like holding deposits at minority-owned banks and helping to expand suppliers businesses in several markets.

The creativity and passion of our teams is powering our success in meeting our environmental and social sustainability goals and is one of the main reasons why, institutional investor recognized World of Care as a top three ESG program in 2023 in the mid-cap gaming and lodging category. In closing, I’m very pleased with another quarter of record results. I want to extend my gratitude to the entire Hyatt family for their dedication in executing our strategy and positioning Hyatt as the preferred brand for colleagues, guests, customers and owners. Our asset-light earnings mix is yielding strong free cash flow, and we remain confident in our ability to drive exceptional results for all our stakeholders. Joan, will now provide more details on our operating results.

Joan, over to you.

Joan Bottarini: Thank you, Mark. This morning, we reported second quarter net income attributable to Hyatt of $68 million and diluted earnings per share of $0.63. As Mark mentioned, this was a record second quarter with adjusted EBITDA of $273 million net deferrals of $28 million and net finance contracts of $14 million. Excluding the impact of transactions, results were up 11% compared to the second quarter of 2022. In the quarter we generated a company record of total management franchise license and other fees in the quarter, of $248 million, an increase of 21% from the second quarter of 2022 driven by the continued success of our asset-light transformation and the continued global recovery we’ve experienced in the quarter.

As a result of our expansion in fee revenue our asset-light earnings mix relative to real estate earnings was 76% for the quarter. Turning to our legacy Hyatt results, adjusted EBITDA was $224 million for the quarter which is approximately 17% higher than the second quarter of 2022, adjusted for currency and the net impact of transactions. Our management and franchising businesses benefited from our larger system size and more fully recovered RevPAR environment. As Mark mentioned, our system-wide RevPAR in the second quarter was up 15% compared to the same period in 2022, or up 8% compared to the second quarter of 2019, fueled by strong rates and meaningful occupancy growth. And we are thrilled to see fully recovered RevPAR in the Asia Pacific region relative to the second quarter of 2019.

Notably the region nearly doubled fee revenue to $42 million for the quarter, compared to the same period last year with Greater China accounting for over 40% of the region’s fees in the quarter. We’re encouraged by the momentum in the region and believe it will continue to serve as a tailwind as international and regional flight capacity increases in the second half of the year. Our Americas and EMEA regions continued their momentum with strong adjusted EBITDA in the quarter relative to 2022. The strength in these segments is driven by a powerful combination of the sustained demand of leisure travel, momentum from business transient travel and strong performance from group business. Moving to our owned and leased segment. When adjusted for the net impact of transactions, adjusted EBITDA for the second quarter decreased 2%, when compared to the second quarter of 2022, and increased 15% when compared to the second quarter of 2019.

The recovery in group and business transient travel coupled with sustained demand for leisure travel led to impressive RevPAR growth of 10% compared to the second quarter of 2022. Our operational and commercial teams continue to do an excellent job driving strong top line results with rates exceeding 4% compared to 2022. It’s notable that second quarter comparable owned and leased margins remained strong at 27%, up nearly 300 basis points from the second quarter of 2019 for the same set of properties. Turning to ALG. Adjusted EBITDA was $49 million. Net deferrals were $28 million and net finance contracts were $14 million. Excluding the impact of foreign currency and onetime strategic investments, ALG’s results increased 7% compared to the second quarter of 2022.

Three key areas drove financial results. First, ALG comparable net package RevPAR increased 8% in the quarter relative to the second quarter of 2022. Total fees remained flat at $36 million for the quarter due to headwinds from the Mexican peso, which strengthened 17% against the U.S. dollar in the last 12 months. It’s important to note that ALG’s hotel revenues are booked and paid in U.S. dollars with no FX impact on base management fees. However, most property expenses are denominated in Mexican pesos and are affected by FX fluctuations, impacting hotel gross operating profits and the related incentive fees we earn. Excluding foreign exchange impact on incentive fees, total fees increased 7% in the quarter. Second, approximately 9,000 membership contracts were signed for ALG’s Unlimited Vacation Club in the quarter, exceeding second quarter 2022 levels by 6% with an increase in the average contract price sold.

UVC now has approximately 140,000 active members as it continues to expand at an impressive pace. Third, ALG Vacations continues to generate solid results, driven by a transformed business model and strong unit pricing, leading to revenue growth of 7%. In the quarter, there were approximately 740,000 guest departures and the business realized a margin of approximately 18% consistent with full year stabilized margin expectations we’ve previously shared. As we look at the second half of 2023, while we recognize the Mexican peso could continue to be a headwind on operating costs and incentive fees, we’re optimistic about the future given sustained strength of leisure travel demand and a favorable pricing environment. I’d also like to provide an update on our strong cash and liquidity position.

As of June 30 2023, our total liquidity of approximately $2.4 billion, included $906 million of cash, cash equivalents and short-term investments and approximately $1.5 billion in borrowing capacity on our revolving credit facility. At the end of the quarter, we reported approximately $3.1 billion of debt outstanding. The only near-term debt maturity is the 1.3% notes due on October 1, 2023 in the amount of $638 million. On July 6, we issued $600 million in notes due in 2027, the proceeds of which will be used together with cash on hand to repay the 2023 notes by maturity. Record operating performance and asset-light growth are contributing to our strong free cash flow. In the second quarter, we repurchased $108 million of Class A common shares and we have approximately $1.4 billion remaining under our share repurchase authorization.

We remain committed to an investment-grade profile and our balance sheet is strong. Finally, I’d like to share some additional insights into our full year 2023 outlook and capital returns to shareholders. We are updating our full year 2023 system-wide RevPAR growth expectations to a range of 14% to 16%, compared to 2022 on a constant currency basis driven by the recovery in Asia Pacific and improving demand in group and business transient we continue to anticipate RevPAR growth will be in the mid to high single digits in the back half of the year. We are reaffirming our expectations of net rooms growth of approximately 6% for the full year of 2023, driven by our strong pipeline and our ability to execute on conversion opportunities. We are updating our net income to approximately $215 million.

And consistent with our estimates from Investor Day we maintain our guidance of adjusted EBITDA plus net deferrals and net finance contracts in the range of $1.2 billion to $1.25 billion with $1.225 billion at the midpoint. Additionally, we are reaffirming free cash flow of approximately $550 million for full year 2023, showing meaningful expected growth compared to 2022. We expect our adjusted SG&A to be in the approximate range of $485 million to $495 million in 2023 inclusive of approximately $20 million of one-time integration expenses associated with carryover projects from 2022 for ALG and the acquisition of Dream Hotel Group and Mr & Mrs Smith. We continue to expect capital expenditures to be approximately $200 million, including investments in ALG and the transformative investment in the Hyatt Regency Irvine renovation, which accounts for nearly one-quarter of 2023 capital expenditures.

As a reminder, the Hyatt Regency Irvine will reopen this month and we will have fully renovated rooms and food and beverage offerings coming online through the rest of 2023 and we’re excited for a full grant opening in early 2024. And finally, our full year outlook for capital returns to shareholders is approximately $500 million inclusive of share repurchases and dividends. In closing our second quarter results demonstrate the effectiveness of our strategy, underscores the strength of our brands and highlights the performance of our talented colleagues around the world. We drove record total fee revenue through strong system-wide RevPAR growth and continued our industry-leading net rooms growth. Looking ahead our optimism is fueled by several factors.

Further recovery in Asia, continued strength of leisure travel, forward bookings for group business and a record pipeline. We are excited for the future growth opportunities that build upon our successful transformation, unlock value through the sale of our real estate and continue to deliver shareholder value through an expansion of our asset-light earnings mix and free cash flow. Thank you. And with that I’ll turn it back to our operator for Q&A.

See also 15 Worst Performing NASDAQ Stocks In 2023 and 11 Most Advanced AI Companies.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Joseph Greff from JPMorgan. Please go ahead. Your line is open.

Mark Hoplamazian: Joe, are you there? You maybe on mute.

Joseph Greff: Can you hear me now?

Mark Hoplamazian: We got you now Joe. Thank you.

Joseph Greff: Thank you for taking my question. Mark, you had mentioned that the World of Hyatt accounted for 22% of room nights in the first half of this year for ALG. What you benchmark that against medium term in terms of percentage of occupancy at the ALG portfolio?

Mark Hoplamazian: Yeah. I think there’s significant room for expansion. I think in the foreseeable future, we see the potential to increase that by about 1,000 basis points. And the reference point that we’ve got is other all-inclusive resorts that we’ve operated for a longer period of time. The one thing that I think hasn’t been realized in its fullest potential yet is MICE business, sorry, group business that we can pull into more of these properties. There are considerations I would say with occasional concerns around safety and security, but the more exposure that we get for meeting planners, travel advisers into our properties in Riviera Maya Cancun especially, the more comfortable that we see people are getting especially on the transient side. And I think group will follow.

Joseph Greff: Great. And then just a follow-up on the real estate transaction environment and we heard you loudly and clearly on the progress made on the two assets. How are you thinking about other assets being market and being brought to the market? And maybe how has that evolved just given the current conditions in the transaction financing environment?

Mark Hoplamazian: Yes. Honestly we’ve not been aggressively pursuing marketing efforts for other assets at this point. We do have a couple of discussions underway with respect to reverse inquiries on specific assets that we own. And we will continue those conversations. I think at least in one or two cases these are relatively bigger hotels and/or maybe more unique hotels that sometimes take some time to put to assemble a deal because they involve other development opportunities on site and the like. So we’ve got a I would say a constant dialogue underway but it’s just not the — in the context of an active marketing initiative. And the principal reason we’ve decided to wait is –well reasons there are two. The first is it’s a bit pp it’s a more challenging environment right now primarily because of financing.

I would say that’s more much more acute in the United States than it is elsewhere because debt availability and pricing of debt in Europe is still quite reasonable and relative to historic levels. And the second reason is because we’re getting paid a lot to wait. Our own and lease results continue to be very strong. I think our — the pace of growth given how extraordinary our recovery was in the second and third quarter of last year has come down. But we have every confidence that we will end the year. We as you know have predicted that we will end up being able to sustain 100 to 300 basis point increase in margins and we think we’ll end this year at the top end of that range. So we feel really good about the progression of earnings and margin expansion.

And so in many ways I don’t think even with higher cap rates in the U.S. the value expectations that we’ve got in terms of dollars and cents associated with sales of hotels is not going to we don’t think we’re going to realize any degradation in that. It might be the result of higher earnings and lower cap rates or sorry higher cap rates lower multiples. But it’s really hard. And I’m certainly the last one who’s going to ever predict the direction of interest rates so I’m not going to go there.

Joseph Greff: Great. And then one final question maybe this is for Joan. When you think about your implied second half EBITDA adjusted EBITDA adjusted economic EBITDA guidance how do you think about the cadence in 3Q and 4Q just consensus estimates or at least reasonably aligned with how you’re viewing 3Q and 4Q?