Hyatt Hotels Corporation (NYSE:H) Q3 2023 Earnings Call Transcript

Hyatt Hotels Corporation (NYSE:H) Q3 2023 Earnings Call Transcript November 2, 2023

Hyatt Hotels Corporation beats earnings expectations. Reported EPS is $0.7, expectations were $0.6.

Operator: Good morning, and welcome to the Hyatt Third Quarter 2023 Earnings Call. All participants are in a listen-only mode. After the speakers’ remarks, we will have 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 Adam Rohman, Senior Vice President of Investor Relations and FP&A. Thank you. Please go ahead.

Adam Rohman: Thank you and welcome to Hyatt’s third quarter 2023 earnings conference call. 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 start, I would like to remind everyone that our comments today will include forward-looking statement 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 statement 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 the call will be available on our website for 90 days. Please note that unless otherwise stated, references to our occupancy, average daily rate and RevPAR reflects comparable system-wide hotels on a constant currency basis. Additionally, percentage changes disclosed during the call or on a year-over-year basis unless otherwise noted. With that, I will turn the call over to Mark.

Mark Hoplamazian: Thanks, Adam. Good morning, everyone. And thank you for joining us. First and foremost, I’d like to take a moment to acknowledge the recent global tragedies that have deeply affected communities around the world, including the August wildfires in Maui, September earthquake in Morocco, and October hurricane in Acapulco, Mexico. We’ve made donations to non-profits on the ground and our Hyatt family has come together to help our impacted colleagues through our Hyatt Care Fund. Additionally, the world was witnessing catastrophic events in Israel and Gaza. While we do not have hotels in the affected region, the Hyatt Hotels Foundation has donated to the International Committee of the Red Cross to support the relief efforts and help those in Israel, Gaza and the impacted region.

Our hearts go out to everyone affected by these events, as well as those impacted by the ongoing war in Ukraine. It is in times like these that are purpose to care for people so they can be their best increases in significance. Turning to our results, we reported our third quarter 2023 earnings this morning, including another quarter of record fees for Hyatt. The transformation of our business model and expansion of our asset-light earnings mix is leading to record fee contribution and greater conversion of earnings into free cash flow. Demand for travel remains strong and was something I personally witnessed during a trip to Asia this past August, my first visit to the region since 2019. Visiting key markets like Shanghai, [Indiscernible] Hong Kong and Tokyo proved insightful and inspiring as I was able to connect with many of our colleagues, owners, partners and guests.

There’s a clear uptick in travel demand in Asia and this momentum, combined with the continued growth and excellence of our food and beverage operations in the region, are leading to strong margins for owners and fees for Hyatt. In fact, performance around the world remains strong. And I’m pleased to share that RevPAR increased 8.9% in the quarter, as occupancy grew 420 basis points, along with a 2.6% increase in average daily rates. We continue to see occupancy levels recover and the month of September underscores this positive momentum, with occupancy down only 260 basis points compared to 2019. Demand for all customer segments remains solid, leisure transient revenue increased 4% over an exceptionally strong third quarter last year as consumers continue to prioritize travel experiences.

Leisure travel remains at elevated levels 22% above the third quarter of 2019, including a 30% increase over 2019 in the month of September. Moving to business transient revenue increased 19% and has recovered to approximately 90% compared to the third quarter of 2019. Although most of our corporate negotiated accounts are on a dynamic pricing model, we are about halfway through discussions for our fixed rate accounts and expect rates to increase in the high-single digit range in 2024 compared to 2023. Lastly, group room revenue increased 10% compared to 2022 and was up 5% compared to 2019. Growth in group revenue accelerated during the quarter and finished up 13% in September compared to 2022. We had another excellent quarter of group production for America’s full service managed properties booking approximately $450 million of business for all periods, a 17% increase.

Looking ahead group pace for the Americas full service managed properties is up 7% for the fourth quarter, and 8% for the full year in 2024 compared to 2023. Turning to World of Hyatt, our loyalty program continues to see impressive growth, adding nearly 8 million new members in the past 12 months. This represents a nearly 24% increase, bringing total membership to over 42 million. Additionally, room night penetration increased nearly 100 basis points during the first nine months of 2023, compared to the same period in 2022 for legacy Hyatt properties. Enrollments at our ALG properties remains strong and in October we passed 1 million loyalty members enrolled on property since the launch last year. And soon members can look forward to roll to Hyatt benefits extending to the Mr. & Mrs.

Smith platform that we acquired in June. Separately, we’re excited about the introduction of Homes & Hideaways by World of Hyatt our new residential vacation platform, allowing members to enjoy private homes and remote hideaways ranging from beachfront locations to mountainside ski chalets. Overall, we’ve expanded our portfolio of properties by 70% over the past six years, which has enabled a 300% increase in the world of Hyatt Loyalty Program members. Adding value to our members experience with Hyatt is a key driver of our growth strategy. We expect to maintain industry leading growth into the future enabled by an 8% increase in our pipeline, reaching a new record of 123,000 rooms representing approximately 40% of our current portfolio. Developer interest in our brands remains extremely strong and the engagement around our new Hyatt Studios brand will support continued growth in our pipeline in the fourth quarter, and for years to come.

We achieved 6.2% net rooms growth and expanded our select service footprint in both the Americas and Asia-Pacific regions. With respect to UrCove, we opened seven properties during the quarter which brings our total open portfolio to 30 properties. And we’re very excited that we have reached 100 properties including our signed pipeline. Notably in September, we opened Andaz Macau, the world’s largest Andaz-branded property with 715 rooms. We expect a very busy fourth quarter of opening activity. As we have said at this time every year, we fully recognize that there are always timing issues that can impact the exact opening days. But the momentum of our growth remains steadfast. We believe that we will continue to realize industry leading growth in the future because of our robust expansion of our pipeline and our proven success and converting existing hotels to our brands.

I’d like to make a few comments regarding the ALG businesses and the related segment results. Since acquiring ALG two years ago, we’ve realized remarkable growth in the business. First, the portfolio has expanded by 12% and the pipeline has grown by 11%. This growth is particularly impressive considering it was achieved during post-pandemic recovery and a challenging financing environment. Second, since our acquisition unlimited vacation club memberships have grown by 19%, reaching 140,000 members as of the third quarter. Third, ALG Vacations’ adjusted EBITDA has increased tenfold since 2019 as a result of changes in market segmentation and through operating leverage, driven by significant investments we have made in automation and digital tools.

And while the business has shown impressive growth and record results to date, we see many opportunities to expand at an even faster pace over the coming years. Looking forward we see tremendously strong demand. Booking pace for our ALG luxury, all-inclusive resorts in Cancun for the festive period is up 8% and for the first quarter of 2024 is up 12%. In the very short term over the past two quarters, we experienced challenging year-over-year comparisons as expected as described earlier this year. By way of reminder, this had to do with the post-Omicron compression of demand and bookings over the second and third quarters of 2022. And these year-over-year comparison issues are temporary. It’s important to bear in mind the unusually high demand Cancun experienced in the third quarter of last year compared to this year’s return to more regular seasonal patterns.

To put the magnitude of last year’s unusual demand into context, adjusted EBITDA for the ALG segment in the third quarter of 2022, was nearly equal to that of the first quarter of 2023. This is highly unusual as the first quarter is the peak travel season for the majority of ALG destinations. Despite temperate demand in the overall Cancun market this quarter net package RevPAR for our ALG properties still increased 1% compared to last year, extraordinary results given the post-Omicron effect last year. We also gained substantial market share relative to competitors a testament to the power of ALG’s vertically integrated platform. We’re very optimistic about the outlook for ALG going forward based on the forward-looking paced data. And these positive trends are a testament to the strength of our ALG team and the durability of leisure demand.

ALG continues to perform significantly ahead of our underwriting expectations, and has accelerated our asset light earnings mix. Based on the latest full year 2023 forecasts, we expect to end this year with an implied multiple of just over 7.5 times our acquisition price. And that is not the end of the story. With the growth in our system, and continued expansion of our capabilities, the effect of multiple will continue to decline over the coming years. Before I conclude, we have updates on several transactions. In September, we announced the sale of our vacation residential management business called Destination Residential Management to an affiliate of Lowe. We are thrilled to work with a company that has expertise in this area. And as a part of this transaction, and through our Homes & Hideaways platform, our World of Hyatt members will continue to enjoy the benefits of these properties in the destinations.

Turning to asset sales. With respect to the two properties we’ve been updating you on throughout the year, we’ve made significant progress. For that first asset that we previously disclosed as being under a letter of intent. We have now signed a definitive purchase and sale agreement. This transaction is expected to close in the fourth quarter. For the second asset that we previously disclosed as being marketed for sale, we now have a signed letter of intent. Assuming this results in the property being sold, the transaction should close in the first half of 2024. The completed sale of the two assets would bring our gross proceeds from asset sales net of acquisitions to approximately two thirds of our $2 billion commitment. The activity level has increased around other asset sales.

We have a letter of intent signed for one additional asset with this transaction expected to close in the first half of 2024. While this is a relatively small transaction, the disposition would reduce near term CapEx spending. We have also launched the marketing process for an additional asset and separately, we are advancing discussions for off-market transactions relating to other properties in our portfolio. As a reminder, we have realized $721 million of proceeds from the net disposition of real estate as of the end of the third quarter of 2023. We remain highly confident that we will reach our disposition commitment by the end of 2024 while realizing attractive valuations and securing durable long-term management or franchise agreements.

In closing, I’m very pleased with another quarter of record results. And I want to emphasize my confidence in the long-term outlook of our business going forward, underscored by a few important points. First, our core management franchise businesses firing on all cylinders, and we feel great about the future. Specifically, demand for travel remains strong, particularly among leisure and group customers resulting in another quarter of record fees. Greater China’s recovery has been remarkable and we expect this will be a continued tailwind for our management fees, net rooms growth and pipeline expansion. We’re excited about the prospects for ALG festive and high season and expect another strong year in 2024 for that business. Second, our owned and leased earnings despite tough year-over-year comparisons are very strong.

Comparable margins were 500 basis points higher compared to the third quarter of 2019. And we are confident that as we exit this year, we will be able to continue to deliver margin growth. Third, we’ve made great progress on asset sales and have strong momentum towards meeting our $2 billion commitment by the end of 2024 at the latest. Fourth, our future growth driven by our record pipeline and new openings is very promising. Even with certain financing challenges primarily in the U.S. are best-in-class brands continue to attract owners for both newbuild and conversion opportunities, underscoring our unique positioning. We remain highly confident in our ability to achieve the long-term growth outlook that we provided at our Investor Day this past May.

I want to extend my gratitude to the entire Hyatt family. Your unwavering commitment and dedication and executing our strategy has positioned Hyatt as the preferred brand for colleagues, guests, customers and owners. Joan will now provide more details on our operating results. Joan, over to you.

Joan Bottarini: Thank you, Mark. For the third quarter, Hyatt reported net income of $68 million and diluted earnings per share of $0.63. Adjusted EBITDA was $247 million and net deferrals plus net finance contracts totaled $35 million. Excluding the impact of real estate transactions, a significant termination fee in last year’s third quarter, and ALG vacation travel credits, earnings were up 2% this quarter. Adjusted EBITDA and net deferrals fell short of internal expectations, in part due to increased costs in our owned and leased portfolio, and our unlimited Vacation Club operations, which I’ll review in a minute. We achieved the historic milestone of $250 million in total management franchise license and other fees, a record breaking quarter, this reflects almost 70% growth from the third quarter of 2019.

Properties added to our system over the past six years from our pipeline, conversions and M&A contributed 38% of this quarter’s fees. As a result of our expanded fee revenue, our asset light earnings mix was approximately 80% for the quarter, fueled by exceedingly strong fee growth and industry leading net rooms growth. Our legacy Hyatt results had strong growth in the quarter with adjusted EBITDA of $197 million. When adjusted for currency, the net impact of real estate transactions and a significant termination fee last year, results are up 22%. Our management and franchising businesses have benefited from our larger system size and robust RevPAR expansion fueled by strong rates and meaningful occupancy growth. Compared to the third quarter of 2019, base fees were up nearly 30%, franchise fees increased by 67% and the number of hotels earning incentive fees this quarter increased by 23%.

This notable growth across all fee revenue streams reinforces the breadth and depth of our successful growth strategy and the global strength of our brands. Our legacy managed and franchised businesses produced an impressive 45% increase in fees compared to 2019, underscoring the strength and recovery of travel demand. The Asia-Pacific region produced impressive growth this quarter, contributing $42 million in fees up 40% year-over-year. Greater China led the recovery with RevPAR up 56% compared to last year and up 20% compared to 2019. The positive momentum we are witnessing in this region fortifies our confidence that Greater China will continue to serve as a strong tailwind into next year. Meanwhile, the Americas region contributed solid fee growth up 7%.

Specifically in the United States, RevPAR demonstrated resilience increasing 3% in the quarter. And finally, the EMEA region has fee growth of 16% compared to last year, excluding a significant termination fee from a pipeline hotel in the third quarter of 2022. Europe continued its strong momentum with RevPAR up 5%. Moving to our owned and leased segments. When adjusted for the net impact of transactions, adjusted EBITDA for the third quarter increased approximately 6% from the third quarter of 2022 and increased 42% from the third quarter of 2019. Recovery of group combined with sustained leisure demand resulted in RevPAR growth of 6%. While we anticipated more challenging year-over-year comparisons in the third quarter, labor costs were higher than expected.

However, we believe we continue to manage costs exceptionally well. And to put this in perspective, our owned and leased forecasts for 2023 estimates hotel expenses to increase 1.2% compounded annually compared to full year 2019 actuals, which is impressive, given core inflation has grown more than 4% over that same time period. The excellent cost controls are evident when looking at our third quarter comparable owned and leased margins, which increased 500 basis points compared to 2019. We expect margins will continue to remain at the higher end of our previously disclosed range of 100 to 300 basis points above 2019 levels. Turning to ALG. Adjusted EBITDA was $50 million and net deferrals plus net finance contracts totaled $35 million. Total fees for ALG were up 2%, excluding the impact from the Mexican peso on incentive fees.

UVC membership contracts increased 2.4%, bringing the total membership base to 240,000. Meanwhile, ALG vacations realized an operating margin of approximately 18% consistent with the full year stabilized margin expectations we previously shared. I’d also like to provide insights into net deferrals activity related to the Unlimited Vacation Club. UVC realized certain incremental costs in two areas. One area relates to member acquisition costs, which were higher due to lower demand levels into Cancun in the quarter. A second area relates to member benefit expenses, including higher rates paid to hotels for free nights redeemed. These benefit increases demonstrate continued strong engagement of UVC members, as well as a benefit to our owners who rely on member room nights to drive more profit for their hotels, leading to incremental incentive fees for Hyatt.

I’d now like to provide an update on our strong cash and liquidity position. As of September 30, 2023, our total liquidity of approximately $2.2 billion included $727 million of cash, cash equivalents and short term investments, and approximately $1.5 billion in borrowing capacity on a revolving credit facility. At the end of the quarter, we reported approximately $3.06 billion of debt outstanding. During the first 10 months of the year, we repurchased approximately $408 million of Class A common shares and have returned approximately $440 million to shareholders inclusive of dividends. As of October 31, we have approximately $1.2 billion remaining under our share repurchase authorization. We remain committed to our investment grade profile and our balance sheet is strong.

I’d now like to share some additional insights into our full year 2023 outlook. We are updating our full year 2023 system-wide RevPAR growth expectations to a range of 15% to 16% compared to 2022 with the midpoint improving due to the continued recovery in Asia-Pacific and improving group and business transient demand. We are reaffirming our net room’s growth of approximately 6% for the full year of 2023. We remain confident in our growth due to the strength of our record pipeline and our ability to execute conversion opportunities. We are updating our guidance for net income to approximately $210 million and adjusted EBITDA and net deferrals plus net finance contracts to a range of $1.175 billion to $1.195 billion. The midpoint of the range of $1.185 billion implies over 15% growth compared to the full year of 2022.

This update to our midpoint reflects the estimated impact of the following items on the second half of 2023, which we’ve all covered in our comments this morning. Higher costs within our owned and leased portfolio, incremental expenses for UVC, lower than expected levels of demand into Cancun, a temporary market dynamic as pace is picking up into the Hyatt season and the impact of the Mexican peso on ALG. We are reaffirming free cash flow of approximately $550 million for full year 2023, showing meaningful expected growth compared to 2022. We are lowering our adjusted SG&A to be in the approximate range of $480 million to $490 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’re also lowering our expected capital expenditures to be approximately $190 million, including investments in ALG and the transformative investment in the Hyatt Regency Irvine renovations. We’re pleased that the Hyatt Regency Irvine reopened in the third quarter earlier than expected and on budget, and with a full grand opening expected in the first quarter of 2024. Finally, our full year outlook for capital returns to shareholders remains the same at approximately $500 million inclusive of share repurchases and dividends. I will conclude my prepared remarks by saying we are very pleased with our third quarter results, which we believe demonstrate our unique positioning and differentiated model. Our recent inclusion in the S&P Midcap 400 Index is a clear indication of the continued successful execution of our transformation and its recognition in the market.

We delivered strong RevPAR growth and drove a record level of fees, expanded our development pipeline and delivered outsized net rooms growth. We’re proud of the execution of our long-term strategy that has enabled us to accelerate our asset-light earnings mix to 80%, unlock value to the sale of our real estate and return capital to shareholders. Thank you. And with that, I’ll turn it back to our operator for Q&A.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from Patrick Scholes from Truist Securities. Please go ahead, your line is open.

Patrick Scholes : Hi, good morning.

Mark Hoplamazian : Good morning.

Patrick Scholes : Mark, given the headlines in various real estate concerns in China and, and possible economic slowdown. Can you give us your latest the views and thoughts on hotel developments for China for you. Thank you.

Mark Hoplamazian : Sure. Thank you, Patrick. Look, demand in China is extremely strong. And international travel is steadily recovering. I think the first quarter was down 60% to 2019. Second quarter was down 40, third quarter was down something like 19 or 15, something like that mid to high-teens. So we we’re seeing a steady increase in international inbound, which is really encouraging. A little surprising to me, actually, because air cover and air schedules are still well below where they were before. But and the relative the relevance of that is that the inbound international travelers are spending more. So there’s a lot of demand performance in hotels is really good. We’re seeing a very strong continuous pipeline growth, but also new openings for your UrCove, our upper midscale brand.

And also other projects being completed and, and under construction. So I feel really good about the short term. Now there is a dichotomy between more private sector developers and those that have state-owned enterprises either backing them or controlling them. There’s a big dichotomy there, because those who are private and depend on the debt markets are having a very tough time. The debt contraction, the availability contraction is still with us and will remain with us for some time it’s going to take the Chinese government a while to work through the bad bank issue that they’ve got with Country Garden and Evergrande. But in the foreseeable future, I’m actually optimistic that we’re going to be able to maintain both net rooms growth but also pipeline growth.

Patrick Scholes : Okay. Thank you.

Mark Hoplamazian : Thank you.

Operator: Our next question comes from Stephen Grambling from Morgan Stanley. Please go ahead. Your line is open.

Stephen Grambling : Hi, thanks. You gave a lot of puts in takes to the 2024 kind of outlook here. But I think one of the big concerns is just how quickly it seems like some things changed around UVC and to a degree other parts of the business, I’m just wondering if you can one, talk to how to think about UVC specifically in the next year. And he puts and takes there. And then just more broadly, into maybe trying to help level set where you think EBIT down free cash flow should be growing next year relative to the longer term outlook you provided?

Joan Bottarini : Sure, Stephen, I’ll start. Some of those, as you say, puts and takes that we provided relative to 2023 and as they relate to the ALG business, are we believe are temporary. The tempering that we’ve seen in to Cancun had some impact on the ALGV business as well as UVC. And we believe that temporary based on what we’re seeing forward-looking into festive period and into the first quarter of next year. And as far as UVC is concerned, we have we — I related to my prepared remarks, some of the increased costs that we were experiencing, some of those costs are related to the temper demand in Cancun, which again, we believe is temporary and will pick up and the member benefit expenses, these are actually as I noted, a really great sign because when as members use their benefits, and they’re using them at higher rates, because we’re generating higher rates, those are a bit more incremental costs that the club is paying to owners and owners are seeing more profit and, and Hyatt is seeing more fees as a result of that.

But what I would say is that we have the ability and the flexibility to adjust our pricing. And so as we consider what those benefits cost and the rates that some of those needs to be paid at because of current strength and demand and to our hotels that allows us to be able to adjust pricing. So as we look forward, we see these items is temporary and have a lot of confidence into next year. One thing I would mention too, is if you look at the overall ALG performance last year, we generated EBITDA plus net deferrals plus net finance contracts of $388 million. And that included a $27 million adjustment for travel credits, which we’ve gone through before that was primarily in the fourth quarter of last year and a little bit in third quarter a little bit of a headwind in the third quarter.

What our guidance suggests for 2023, that if you exclude those travel credits, we expect the ALG business to be flat to last year overall, which is just a great outcome considering the very strong demand that we saw in 2022. And the health of the business remains strong. As Mark mentioned, the multiple that we expect to achieve this year is 7.5 times and that is reflective of the the flat to last year excluding the credits that I just reviewed.

Mark Hoplamazian : Yeah, the only other thing I would add, Stephen, is that the departures basis business for ALGV which is a much broader or vacations business, much broader set of hotels covered and so forth, was off — was actually up 20% in, close to 20% in the first quarter down 1% in the second quarter down 10% in the third quarter. Not unexpected, exactly what we expected to see now. What we didn’t know and didn’t really appreciate is that a disproportionate number of those departures that were affected are for four-star hotels, not five-star hotels. And that’s a consequence — so that actually explains why our ALG our HIC Hyatt Inclusive Collection hotels have gained significant market share because we’ve been able to maintain and grow our overall results.

ALGV’s departures have been off more — dominated more by four-star weakness year-over-year than five-star. And I just want to reiterate what Joan said, between, everyone was speculating that last year was a blow off period and an all time peak high for leisure travel especially into Caribbean and Mexico and so forth, just not true. To be flat year-over-year is phenomenal with some of the rotation out of Cancun and with a huge FX headwind, it’s quite remarkable, actually. And I think that with travel patterns more normalizing, and I think that our first quarter pace demonstrates that they are at Cancun remains a very attractive destination, we’re going — our expectation is we’re going to continue to grow from here and remain very, very strong.

So I think we have a lot to point to that. That’s fact based. That really gives us Trent tremendous confidence heading into next year.

Stephen Grambling : That’s helpful. And if I could see one, one more in. You did call out some higher expenses. I think in the Americas segment, it looked like the allocated expenses jumped up a little bit. Is there anything that you could provide in terms of quantifying what happened there and how we should think about flow through in some of these fee segments going forward?

Joan Bottarini : Stephen, about half of those were one time and timing related so that that’s not an ongoing expense base. We also had some incremental resources for Dream Hotel Group acquisition that are embedded within the Americas.

Stephen Grambling : Perfect, thank you.

Joan Bottarini : Thank you.

Operator: Our next question comes from Joe Greff from JPMorgan. Please go ahead. Your line is open.

Joe Greff : Good morning, guys. Just maybe a quick clarification, or maybe you can expand on your comments on ALG. Obviously, Mark your comments about you know, ending this year, with a purchase price multiple of a little bit more than 7.5 implies, $350 million or $360 million of adjusted economic EBITDA, when you look at that run rate this year, do you think that is a relatively normalized level, or do you think the first half of this year that’s embedded in that syringe into the $160 million range includes some other things that might be one time or the benefits of a really robust growth? Or do you think the 350 to 360 has to be cut down to think of a normalized year from which you can grow over the next two to three years?