Playa Hotels & Resorts N.V. (NASDAQ:PLYA) Q1 2023 Earnings Call Transcript

Playa Hotels & Resorts N.V. (NASDAQ:PLYA) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Good morning, and welcome to the Playa Hotels & Resorts First Quarter 2023 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Ryan Hymel with the company. Please go ahead.

Ryan Hymel: Thank you very much, Wasanabi. Good morning, everyone and welcome to Playa Hotels & Resorts first quarter 2023 earnings call. Before we begin, I’d like to remind participants that many of our comments today will be considered forward-looking statements and are subject to numerous risks and uncertainties that may cause the company’s actual results to differ materially from what has been communicated. Forward-looking statements made today are effective only as of today and the company undertakes no obligation to update forward-looking statements. For a discussion of some of the factors that could cause our actual results to differ, please review the Risk Factors section of our quarterly report on Form 10-Q, which we filed last night with the SEC.

We have updated our Investor Relations website at investors.playaresorts.com with today’s recent releases. In addition, reconciliations to GAAP of the non-GAAP financial measures we discuss on this call were included in yesterday’s press release. On today’s call, Bruce Wardinski, Playa’s Chairman and Chief Executive Officer, will provide comments on the first quarter demand trends and key operational highlights. I will then address our first quarter results and our outlook. Bruce will wrap up the call with some concluding remarks before we turn it over to Q&A. With that, I’ll turn the call over to Bruce.

Bruce Wardinski: Great. Thanks, Ryan. Good morning, everyone and thank you for joining us. I would like to wish everyone a happy Cinco de Mayo and say personally, I’d much rather be at one of our resorts in Mexico than in our office in Fairfax, but I hope people are enjoying it wherever they are. Our first quarter results exceeded our expectations as the momentum in our business continued through the remainder of the high season, with broad-based strength shown across all of our markets. One housekeeping item before we begin the fundamental review of the quarter we will be sunsetting comparisons to 2019 and resuming traditional year-over-year commentary exclusively for today’s discussion. Playa’s owned resort EBITDA of $109.4 million in the first quarter was the highest in the company’s history despite the significant negative impact from the 2 dual resorts in the Dominican Republic that transition to Playa management and foreign currency headwinds.

The better-than-expected EBITDA was driven by year-over-year ADR growth in our legacy portfolio of nearly 17%, bringing the reported ADR growth for the quarter to approximately 27.4%. As a reminder, our expectation was that the first quarter would represent the highest year-over-year ADR growth for 2023 as we lapped the impact from Omicron last year. Additionally, our operations teams executed extremely well at the resort level, delivering 50 basis points of resort margin expansion on a reported basis despite an approximate 180 basis points FX drag from the appreciation of the Mexican peso. The core legacy portfolio resort margins, excluding the Jewels improved 160 basis points year-over-year, inclusive of 180 basis point foreign currency drag.

As I mentioned, fundamental strength during the quarter was broad-based with our core legacy portfolio surpassing 80% occupancy for the first time post-pandemic in all geographies reporting double-digit year-over-year ADR gains. Jamaica had another strong quarter, reporting the highest year-over-year ADR and resort margin expansion among our segments, aided by a significant increase in MICE revenue during the first quarter as the recovery and normalization of that market continued. In Mexico, the Yucatan once again led the way on occupancy rate for Playa, while growing ADR double-digit year-over-year and the Pacific Coast reported its best occupancy rate during the post-pandemic period as well. As I mentioned, both segments were negatively impacted by the sharp move in the Mexican peso during the quarter and both would have seen improved margins year-over-year, excluding the impact of FX.

In the Dominican Republic, our legacy DR resorts, excluding the Jewel Palm Beach and Jewel Punta Cana resorts, which we are attempting to sell, also achieved their highest occupancy rate in the post-pandemic period while driving approximately 22% year-over-year ADR growth, yielding nearly 300 basis points of resort margin expansion year-over-year. The two Jewel resorts and the DR segment results were in line with the expectations we laid out on our last earnings call, representing an approximate $10 million year-over-year EBITDA drag. However, we expect the profit drag from these resorts to improve during the second quarter. We do not have any information to share with respect to the timing of the disposition of the two resorts, but hope to have more to share on that in the future.

On the booking front, demand has remained strong despite the broader macroeconomic concerns, and we have achieved our goal of increasing Playa’s transient consumer direct revenue mix of bookings, excluding the DR Jewels to at least 50% by 2023. In aggregate, during the first quarter of 2023, 51.4% of Playa-owned and managed transit revenues booked were booked direct, up on 160 basis points year-over-year, growing year-over-year for the third straight quarter. During the first quarter of 2023, playaresorts.com accounted for approximately 10% of our total Playa-owned and managed room night bookings continuing to be a critical factor in our customer sourcing and ADR gains. Taking a look at who is traveling, roughly 36% of the Playa-owned and managed room night stays in the quarter came from our direct channels, down 100 basis points year-over-year as our group mix improved significantly year-over-year by 460 basis points.

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Our OTA mix has remained the most depressed channel compared to pre-pandemic levels. Geographically, the biggest change in our guest mix during the first quarter was the continued recovery of our Canadian guest mix, which was up approximately 400 basis points year-over-year as well as our Mexican source guest mix, which was up 300 basis points. Our European source guest mix was down significantly again year-over-year, but in line with pre-pandemic levels. Our Asian source guest mix improved modestly year-over-year, but remains the most depressed as it is only approximately 75% to 80% recovered. Our visibility remains a critical factor of our success as our booking window remained at just over 3 months. Once again, I would like to thank all of our associates that have continued to deliver world-class service in the face of pandemic-related challenges and rising operating costs.

Their unwavering passion and dedication to service from the heart is what truly sets Playa apart. Finally, on the capital allocation front, we purchased approximately $41 million worth of Playa stock during the first quarter and an additional $20 million thus far in the second quarter, bringing our total repurchases since resuming our program in September 2022 to just over $107 million. We continue to believe that our stock provides a tremendous value relative to the fundamentals and share repurchases are a phenomenal use of capital for our free cash flow. With that, I will turn the call back over to Ryan to discuss the balance sheet and our outlook.

Ryan Hymel: Thank you, Bruce. Good morning, again. I’ll begin with a recap of the segment fundamentals, followed by an overview of our balance sheet and expected uses of cash and conclude with our updated outlook. Before I begin, I’d like to highlight that beginning with the first quarter of 2023, we’ve elected to reclassify on-property room upgrade revenue from non-package revenue to package revenue to be consistent with industry trends. We’ve recasted prior period as well to conform with the current period presentation. And a reconciliation of the changes made to the prior reporting for 2021 and 2022 can be found in our investor deck on Slide 5. So turning to fundamentals first, our first quarter results exceeded our expectations as a result of higher ADR growth and easing pressure from energy costs, leading to resort margin expansion of approximately 50 basis points year-over-year despite a nearly 180 basis point headwind from foreign exchange and a 240 basis point headwind from the 2 Jewel properties in the Dominican Republic.

The ADR strength was broad-based with all segments reporting double-digit year-over-year ADR growth, excluding, again, the Jewel assets in the DR as this was the first Q1 we’ve had in the post-pandemic period with no significant COVID-related challenges. On the cost front, as I mentioned in our last earnings call, we began to see stabilization in food and beverage and utilities costs on a per unit basis in the middle of 2022. And we’re hopeful that the inflationary pressure from these 2 areas will begin to ease as we moved into 2023 and lapped the surge that occurred around the start of 2022. We began to see signs of improvement during the fourth quarter and that carried over into the first quarter. Although it’s nice to see some cost relief, these expenses can be volatile quarter-to-quarter as usual.

At the segment level, Jamaica led the way in year-over-year ADR and occupancy growth and margin improvement. The segment experienced its highest group room night mix helping yield ADR and closing the gap versus other segments ADR improvement compared to the pre-pandemic period. As a reminder, Jamaica got off to a slower start in 2022 due to the Omicron variant having a disproportionate impact on the segment given its COVID testing requirements at the time. On the margin front, Jamaica once again benefited from better-than-expected food and beverage and utilities expenses. Keep in mind that when comparing results in Jamaica versus other segments that Jamaica generally has higher operating costs in our other segments and typically experiences higher ADRs as well.

Looking at our other segments, Yucatan Peninsula continued to deliver strong results with sequential occupancy improvements to a post-pandemic high of almost 84% and reported year-over-year ADR growth of roughly 15%. Reported owned resort EBITDA margins were down slightly, 20 basis points year-over-year, mainly as a result of the 370 basis point negative impact from foreign exchange. Food and beverage and utilities expenses were favorable year-over-year on a currency-neutral basis, while other labor costs, specifically union negotiations negatively impacted margins. Margins were also favorably impacted by the timing of sales and marketing spend. The Pacific Coast had another fantastic quarter year-over-year with ADR improvement up 19%, leading to robust margin performance as utility expenses were less of a headwind year-over-year.

The Pacific Coast also experienced significantly higher year-over-year MICE Group mix, helping drive an increase in non-package revenue per sold room. Segment margins were negatively impacted approximately 350 basis points, again as a result of the sharp fluctuation in the Mexican peso. In the Dominican Republic, our legacy resorts, the Hyatt Cap Cana and Hilton La Romana grew ADR 20% year-over-year with occupancy of nearly 82%. Underlying non-package revenue per sold room growth at these resorts was also stellar due to a higher mix of MICE Groups. As a reminder, we reported our Hilton and Hyatt properties a bit ahead of schedule following the disruption in the fourth quarter related to Hurricane Fiona, just in time for the high season. The fundamental improvement year-over-year led to resort margins at these resorts approaching 50% as food and beverage and utilities expense pressure eased on a year-over-year basis compared to the fourth quarter.

The segment performance was dragged down by the 2 Jewel properties we recently assumed management of, though the performance was in line with our expectations. We continue to expect the performance of these 2 Jewels to improve sequentially next quarter while we execute the sale process of the resorts. Turning to our MICE Group business. Our 2023 net MICE Group business on the books is approximately $55 million versus $50 million at the time of our last earnings call and is well ahead of our final full year 2019 MICE revenue of $32 million. Looking ahead to 2024, we currently have $29 million of MICE revenue on the books, well ahead of where we were at the same time last year. Finally, turning to the balance sheet. We finished the quarter with a total cash balance of approximately $282 million and total outstanding interest-bearing debt of just under $1.1 billion.

We currently have no outstanding borrowings on our $225 million credit facility, and our net leverage on a trailing basis stands at 3.1x. We anticipate our cash CapEx spend for full year 2023 to be approximately $70 million to $90 million for the year, partitioned out between $35 million to $40 million for maintenance CapEx and the remainder to more ROI-oriented projects. Also, effective April 15, we entered into two interest rate swaps to mitigate floating rate risk in our new 2022 term loan. We entered into a 2 and 3-year contract and each have a fixed notional amount of $275 million for a total of $550 million. And each contract carries fixed SOFR rates of 4.05% and 3.71% respectively. And again, on the capital allocation front, as Bruce mentioned, we purchased $41 million of stock in the first quarter.

And with our leverage ratios well before – well below 4x the anticipated free cash flow generation of the business and the attractive valuation of our stock, we believe repurchasing shares is a very compelling use of capital and intend to continue to use discretionary capital repurchase shares going forward, depending, of course, on market conditions. We will also continue to invest in our business to deliver value to our guests and shareholders, but the bar is high for new projects on a risk-adjusted basis given the valuation of our stock. Now turning our attention to our 2023 outlook. Our RevPAR growth outlook has improved, driven by higher ADR gains for every quarter of the year, while occupancy has largely remained steady. We now expect full year adjusted EBITDA of $265 million to $285 million, which is an increase from our last call.

And that is inclusive of a $20 million plus negative impact from the appreciation of the Mexican peso, $15 million of which is expected to hit in Q2 through Q4, assuming today’s spot rate. Our core legacy portfolio EBITDA forecast has continued to improve, driven by ADR gains I just mentioned. We are also forecasting a slower ramp of the two Jewel properties in the Dominican Republic in the second half of the year as they were unable to make up ground after missing the key summer selling season. For the second quarter, we expect reported occupancy in the low 70%s, which includes a mid-single-digit drag from the two Jewel properties in the DR. We expect Q2 reported ADR to grow low double-digits on a year-over-year basis. This is compared to the previously expected high single-digit to low double-digits and owned resort EBITDA margins to expand year-over-year despite an approximately $5 million year-over-year EBITDA drag in the DR from the two Jewel properties and continuing FX headwinds.

So putting it all together, we expect Q2 owned resort EBITDA of $79 million to $83 million, management and Playa collection fee income of $2.5 million to $3 million, corporate expense of $14 million to $15 million, all leading to consolidated adjusted EBITDA guidance of $66 million to $71 million. Given our booking window, we are currently 90% booked for the second quarter. For the second half of 2023, we expect reported occupancy to be in the mid-70%s and year-over-year ADR growth to be up again mid-single digits on a reported basis. We expect legacy owned resort EBITDA margins to be flat to modestly up on a year-over-year basis in the second half of the year with the two Jewel properties in the DR to be a drag on EBITDA during the second half of the year.

So to recap, the following are key inputs to consider as you think about our full year 2023 outlook. We expect full year occupancy to be slightly higher than in 2022, adjusting for extraneous factors and low double-digit to mid-teens ADR growth for the full year. We expect resort margins to improve year-over-year despite the significant drag from the DR Jewels and again, a $20 million plus impact from foreign exchange headwinds. We anticipate a better inflation rate of our cost basket as compared to what we’ve experienced during 2022, although it will likely continue to be elevated. We have good visibility on our labor costs and see the wage increase is slightly higher than what we experienced in 2022, but we’re experiencing lower cost inflation in food and beverage and utilities during the first quarter of 2023.

And while we hope the lower prices persist, these categories can again be quite volatile. We again anticipate roughly $14 million to $15 million per quarter in corporate expense and $2.5 million roughly per quarter in management and Playa collection fee income. We hope this framework helps guide you as you fine-tune your models and give you further insight to what we’re seeing and expecting. With that, I’ll turn it back over to Bruce for some closing remarks.

Bruce Wardinski: Great. Thank you very much, Ryan. With the increasing uncertainty in the macro backdrop, we are diligently focused on the areas within our control and are carefully monitoring the landscape. We continue to believe the price certainty and amazing value provided by Playa’s all-inclusive resorts resonates with travelers even in the face of an uncertain economic backdrop. With that, we’ll open up the line for any questions.

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Q&A Session

Operator: Thank you. Our first question comes from Patrick Scholes with Truist Securities. Please go ahead.

Patrick Scholes: Hi, good morning, everyone.

Bruce Wardinski: Good morning.

Patrick Scholes: Good morning. A couple of questions here. First one is, just to be clear, with the $20 million negative FX impact in your guidance, to be clear, your prior EBITDA guidance did not assume any impact. Is that correct? So that $20 million is all include?

Ryan Hymel: That is correct.

Patrick Scholes: Okay. Thank you. Next question, and I jokingly say we are moving on past COVID because we’re going to talk about seaweed. Here I keep reading in headlines about this horrible seaweed in the middle of the Atlantic heading westward. Any thoughts about potential impact? Or do you have any conservatism baked into your numbers around that?

Bruce Wardinski: No. I mean that is a seasonal occurrence. It happens every single summer. There are some scientists who say it’s going to be a little worse this year. But the nice thing about it is it goes everywhere. So it goes to Florida. It goes to all of the Caribbean Islands, it goes everywhere, and people keep traveling. So we have a variety of mechanisms we have in place at all of our resorts to deal with it. And I think we manage it relatively well. But it is what it is and it’s been something we’ve had for literally the entire time Playa has been in existence, so…

Patrick Scholes: Okay. Thank you. And then just one last high-level question, a long-term question here. Actually, I’ll have two – one more question on that as well. In three markets right now, what are your long-term intentions for possibly diversifying – continuing to diversify geographically beyond three markets?

Bruce Wardinski: Sure. That’s a great question, Patrick. Our goal certainly pre-pandemic, we were looking at pretty wide-ranging geographic expansion in different parts of the world. And obviously, the pandemic kind of cut those – kind of cut those plans short. But from our standpoint, all-inclusive is a product, is a concept that, as we said in our remarks, resonates incredibly well with consumers. You’ve seen more and more interest from hotel companies, brands, investors, everybody in all-inclusive because it’s driven by the consumer’s desire to go to all-inclusive. The price certainty, the value proposition of it is very strong. So there is a very long history of all-inclusive in Europe, in the Mediterranean, in North Africa, certainly in the countries that we are in some other Caribbean countries and some down in Latin America.

All of those kind of markets, ones that are big enough to support kind of the lift that we think is required to be successful, we’re interested in expanding. But I think you’ll see in the next 1 to 5 years Playa expanding into the new markets. So we think there’s great opportunities there. And with the success that we have had, it’s been 10 years now. So we’ve been managing all-inclusive resorts for 10 years and we have built up a very strong reputation as to our quality level. And so I think it is the time to expand and I think you’ll see that in the very near future.

Patrick Scholes: Okay, thank you.

Ryan Hymel: Thank you.

Operator: The next question comes from Tyler Batory with Oppenheimer. Please go ahead.