Playa Hotels & Resorts N.V. (NASDAQ:PLYA) Q1 2024 Earnings Call Transcript

Playa Hotels & Resorts N.V. (NASDAQ:PLYA) Q1 2024 Earnings Call Transcript May 7, 2024

Playa Hotels & Resorts N.V. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the Playa Hotels & Resorts Q1 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] 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 sir. I would now like to turn the conference over to Ryan Hymel. Please go ahead.

Ryan Hymel: Thank you very much Nico and good morning everyone and welcome again to Playa Hotels & Resorts first quarter 2024 earnings conference 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 Securities and Exchange Commission.

We’ve updated our Investor Relations website at investors.playaresorts.com with the company’s recent releases. In addition reconciliations to GAAP of the non-GAAP financial measures we will discuss on this call were included in yesterday’s press release. 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’ll then review our first quarter results and our outlook for 2024. 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: Hey thanks Ryan. Good morning everyone and thank you for joining us. Before we dive into our results, all commentary on comparable full year 2024 KPIs is synonymous with our legacy portfolio as the Jewel Palm Beach was closed for a portion of Q1 2023 and the Jewel Punta Cana was sold during Q4 2023 and thus would not be comparable for the full year metrics. Our first quarter results exceeded our expectations coming in well above the high end of our expected adjusted EBITDA range. Better than expected results were broad-based across our segments, driven by strong demand during the high season. Playa’s owned resort EBITDA of $194 million in the first quarter of 2024 included a significant year-over-year foreign currency exchange headwind of approximately $4.8 million due to the appreciation of the Mexican peso, a benefit from business interruption insurance proceeds of approximately $400,000, and a modest EBITDA contribution from the Jewel Palm Beach Resort.

For Q1 2024, we estimate that FX headwinds were a negative 160 basis point impact on our reported owned resort EBITDA margin and 170 basis points drag on our legacy portfolio, which excludes the Jewel Resorts in the Dominican Republic. Business interruption proceeds favorably impacted resort margins by approximately 10 basis points. Adjusting for all of these factors, underlying owned resort EBITDA growth was up approximately 17% in the first quarter for the total portfolio and up approximately 11% for the comparable portfolio. Strength in bookings that we began to see during the second half of 2023 carried into the first quarter, particularly into Mexico. Demand was notable across our portfolio with all segments reporting positive year-over-year RevPAR growth despite the difficult growth comparison from last year’s first quarter and the headwind from the shift of the Easter holiday in 2024.

Our results in the Yucatan were once again quite exceptional on a currency-adjusted basis with occupancy in line with the first quarter of 2019 but still trailing our 2018 peak and ADR growth of nearly 3% year-over-year. Our operations team continued to execute at a high level on the Yucatan, delivering currency neutral-margin expansion of approximately 240 basis points year-over-year on mid-single-digit RevPAR growth. As you may recall, following the realignment of key management personnel, we’ve been revisiting various processes, staffing models, and procurement practices since the second quarter of 2023. And the results of our efforts really began to show in the second half of 2023 as ADR growth moderated. As we’ve mentioned on previous earnings calls, the process improvements will be iterative and we will continue increasing efficiency where possible to help offset the impacts of rising wages and inflation in various expense categories.

We believe we can hold FX neutral margin steady year over year in the Yucatan in 2024 on positive low-single-digit to mid-single-digit ADR growth, despite continuing underlying wage pressure. In the Pacific, ADR growth was anticipated to be negative as a result of a large MICE group buyout at legacy rates from 2020. However, the buyout led to a record high first quarter occupancy rate for the segment, resulting in year-over-year RevPAR growth of 6.2%. Strong revenue performance combined, with our cost control efforts delivered 320 basis points of currency neutral resource margin expansion year-over-year in the Pacific. Additionally, we have decided to accelerate our renovation plans in the Pacific, now expect the construction disruption impact on EBITDA to be at the high end of the previously communicated range.

We believe this is the best path forward to capitalize on the increased MICE demand we are seeing, and position our resort in Los Cabos for a strong high season in 2026 and beyond. As a reminder, the Hyatt Ziva, Los Cabos has not had any major renovation work done since the renovation that occurred following Hurricane Odile in 2014. Turning to the D.R. We completed the sale of the Jewel Punta Cana in late December of 2023 and the Jewel Palm Beach was closed for a significant portion of Q1 2023, which we expect will lead to a meaningful year-over-year increase in EBITDA during 2024. Results in the segment were aided by the comparison from 2023, but the core comparable resorts also had a very strong quarter with double digit RevPAR growth in mid-teens underlying EBITDA growth Finally, Jamaica had another solid quarter, with occupancy increasing year-over-year reaching Q1 2019 levels and mid-single digit ADR growth, despite a significant headwind from lower MICE group mix year-over-year.

Segment was also a good start in 2024 with US State Department’s Travel Advisory notice for Jamaica on January 23rd, has had a negative impact on the segment near term, as cancellations ticked up meaningfully thereafter. Although the Travel Advisory doesn’t pertain specifically to our resorts as much as the major metropolitan areas in other regions of the country, and the level of the Travel Advisory was unchanged from the prior advisory, the press coverage of this advisory notice was significantly greater than prior warnings. Bookings in Jamaica saw a rapid improvement as we move through February, giving us a sense of optimism that the impact would be fairly short-lived, but demand for the summer season did not continue to improve, leading to a significantly higher negative impact than we previously anticipated.

Bulk of the impact experienced so far in Jamaica has been for Q2 and Q3, with revenue pacing down mid teens, while our fourth quarter pacing is holding up much better with a low single digit decline. Looking at demand as a whole, we saw steady demand through the quarter and the pacing into the summer season remained strong outside of Jamaica. In aggregate, during the first quarter of 2024, 48.4% of Playa owned and managed transient revenues booked were booked direct was around 300 basis points year-over-year. The decline was driven by fewer World of Hyatt redemption bookings, following a spike during the first quarter of 2023, ahead of a change in the conversion rate for redemptions, which pulled forward quite a bit of demand. During the first quarter of 2024, playaresorts.com accounted for approximately 11.3% of our total Playa owned and managed transient room night bookings, continuing to be a critical factor in our customer sourcing and ADR gains.

Taking a look at who is traveling, roughly 41.7% of the Playa owned and managed transient room nights stays in the quarter came from our direct channels. Graphically, the biggest change in our guest mix during the first quarter was our Canadian source guest mix, which increased 110 basis points year-over-year following several quarters of year-over-year declines. While this is encouraging, our Canadian guests make still has plenty of room to improve because it is only approximately two thirds recovered versus pre-pandemic levels. Asian source guest mix improved modestly, year-over-year. That remains the most depressed as it is still only approximately 25% recovered versus pre-pandemic levels. Our visibility remains a critical factor of our success, as our booking window was just over three months during the first quarter.

Finally, on the capital allocation front, we repurchased approximately $32.4 million worth of Playa stock during the first quarter, and an additional $17.4 million thus far in the second quarter, bringing our total repurchases since resuming our program in September 2022 to approximately $280 million for approximately 22% of the shares outstanding. Once, again I would like to thank all of our associates, who have continued to deliver world-class service in the face of unexpected challenges and rising operating costs. Their unwavering passion and dedication to service from the heart, is what truly sets Playa apart. With that, I will turn the call back over to Ryan to discuss the balance sheet and our outlook.

Ryan Hymel: Thank you very much, Bruce. Again, before I begin all references to expense and margin KPIs are on a currency neutral basis, and also exclude business interruption proceeds unless otherwise stated. As we mentioned, our first quarter results were well ahead of our expectations, as demand remained strong throughout the quarter. Healthy demand, easing pressure from food and beverage prices and our cost efficiency efforts led to reported margin expansion of 140 basis points year-over-year, which included a 160 basis point headwind from foreign exchange and a 10 basis point benefit from business interruption proceeds, as well as a 160 basis point tailwind from the two Jewel Resorts in the Dominican Republic. So, taken all together underlying reported resort EBITDA margins increased 290 basis points year-over-year in the first quarter.

Adjusting for FX and business interruption, our legacy portfolio delivered 140 basis points of resort margin expansion. On the cost front, food and beverage costs continue to be a favorable — continue to be favorable, as a result of lower input prices and cost efficiency efforts by our operations team. Labor costs were also favorable in the quarter, reflecting our efficiency measures, but wage inflation generally remains a headwind. As Bruce mentioned, we are undertaking efforts to streamline and improve our procurement processes across the entire portfolio and take advantage of our scale. These efforts are really just beginning to bear fruit from the heavy lifting undertaken in 2023, and we expect the benefits to accelerate, as the company moves throughout 2024 and beyond, as our cost savings are averaging mid-single-digit to high single-digit improvements per category.

We estimate that we’ve only penetrated approximately 30% with the potential procurement savings thus far with half of the savings flowing through our costs during the fourth quarter of 2023. Underlying expense inflation has remained steady since our last update with any changes in our margin expectations for the year resulting from higher construction disruption and de-leveraging in Jamaica from weaker demand. Turning to our MICE group business, our 2024 net MICE group business on the books is approximately $65 million, up roughly 12% compared to the same time last year. Our MICE business is much more balanced on a year-over-year basis compared to what we experienced during 2023, as 2023 lapped incredibly difficult MICE comparisons in the second half of the year.

Finally, turning to the balance sheet, we finished the quarter with a total cash balance of $285.3 million and total outstanding interest-bearing debt of approximately $1.09 billion. We currently have no outstanding borrowings on our $225 million revolving credit facility. Our net leverage on a trailing basis stands at 2.8 times, excluding lease capitalization. We anticipate our cash CapEx spend for full year 2024 to be approximately $110 million to $120 million for the year, partitioned out between approximately $40 million to $50 million for maintenance and other critical CapEx and the remainder designated for ROI oriented projects. This increase is largely due to the acceleration of the previously discussed renovation at our Hyatt Ziva Los Cabos resort.

Also, as a reminder, effective April 15, 2023, we entered into two interest rate swaps to mitigate the floating interest rate risk in our term loan due 2029. We entered into a two and three year contract, both of which have a fixed notional amount of $275 million and carry a fixed SOFR rates of 4.05% and 3.71% respectively. Separately, we’ve implemented foreign exchange hedges on approximately half of our Mexican peso exposure for 2024, which should greatly reduce the volatility of the impact of our reported EBITDA this year. Based on the exchange rates at the time we entered into the FX forwards, we estimate the full year 2024 EBITDA impact from the Mexican peso year-over-year to be approximately $7 million to $10 million, which is slightly better than our previous outlook of $7 million to $11 million.

Nearly 75% of the impact is expected to be in Q1 2024 and nearly 100% of it in the first half of the year based on current spot rates. In the capital allocation front, as Bruce mentioned, we repurchased an additional $32.5 million of stock during the first quarter, an additional 17.5% thus far in Q2 2024. Since we began repurchasing shares last September, we’ve purchased over 36.6 million shares or approximately 22% of our shares outstanding at the time. We still have over $145 million remaining on our existing repurchase authorization. With our leverage ratios at or near three times, the anticipated free cash flow generation of the business and the attractive valuation of our stock, we believe repurchasing shares is still a very compelling use of capital and intend to use our discretionary capital to repurchase shares going forward depending on market conditions.

Now turning our attention to our outlook for 2024, first, I’d like to remind everyone of the unique items affecting comparability of our financials, compared to 2023 before we dive into the outlook. First with foreign exchange, as a reminder the depreciation of the Mexican peso had a $24.5 million impact on adjusted EBITDA in 2023. Business interruption, as a reminder in 2023, we recognized $6.1 million of BI proceeds with $4.3 million of that coming in the second quarter of 2023 and approximately $900,000 in Q3 and Q4, respectively. The DR Jewels, they recorded an EBITDA loss of approximately $15 million in 2023 and negatively impacted, owned resort margins by approximately 280 basis points. Roughly a third of their loss occurred during the first quarter of 2023, as the Jewel Palm Beach as a reminder was closed for the majority of the quarter.

So with all that in mind, looking forward, we continue to expect full year 2024 adjusted EBITDA to be between $250 million to $275 million, which includes the following key considerations and inputs. We expect occupancy to be up low-single digit percentage points for the total portfolio and down modestly for the legacy portfolio. This change reflects the travel advisory having a continuing negative impact on demand into Jamaica. We expect ADR growth of mid-single digits for the total portfolio and low-single digits for the comparable legacy portfolio. The driving force of the delta between the two is a positive 360 basis point impact from removing the lower ADR room night mix from the Jewel Punta Cana, that we sold last year and partially offset by the ramping occupancy at the Jewel Palm Beach Resort.

We expect a RevPAR growth of high-single digit to low-double digit for the total portfolio and low-single digit for the legacy portfolio. We estimate that the disposition of the Jewel Punta Cana resort and ramping occupancy at the Jewel Palm Beach resorts contributes approximately 900 basis points to 2024 RevPAR, but the vast majority of that contribution being the result of disposing the Jewel Punta Cana resort last year and only a modest contribution to RevPAR from the Jewel Palm Beach resort as improving occupancy partially offset by the negative mix of Palm Beach’s ADR. We still expect foreign exchange headwinds, as we mentioned of approximately $7 million to $10 million year-over-year based on current exchange rates and net of any FX forwards.

As Bruce mentioned, we expect construction disruption impact of high-single digit dollars of EBITDA in the Pacific at the Hyatt Zilara Cancun. And inflation, as we’ve mentioned several times on the call, we’ve been diligently working to improve our efficiency. We believe, we’ve lowered our margin leverage hurdle for approximately 4% ADR rate growth to hold margins flat on a currency and business interruption adjusted basis. We expect a modest net negative impact from annualizing corporate expense increases from 2023, partially offset from higher and growing fee income. With respect to the cadence of our profitability, we expect the first quarter to show the most robust profit in the year given the Q1 2023 comparison which included a $5 million loss at the DR Jewels.

The drag from construction disruption and a weaker demand in Jamaica are likely most pronounced in the second and third quarter and hopefully, improve somewhat in the fourth quarter. But now turning our attention to the second quarter, we expect reported occupancy to be in the low-70% and reported package ADR to increase mid-single digit percentage on a year-over-year basis. We expect owned resort EBITDA margins to decline significantly year-over-year, given the 4.3 million of business interruption proceeds recorded in Q2 of last year, which was a positive 180 basis point impact to the comparison period and continuing foreign exchange headwinds in Mexico, which are expected to negatively impact margins by approximately 80 to 100 basis points.

Put altogether, we expect Q2 owned resort EBITDA $67 million to $72 million. The Playa collection and management fee income of $2 million to $3 million, corporate expense of roughly $15 million to $16 million which includes a negative FX impact. Finally adjusted EBITDA of $54 million to $59 million, given our booking window, we’re currently 90% booked for the second quarter. We hope all that frame up helps guide you as you fine-tune your models and gives further insight in what we’re seeing and expecting. With that, I’ll turn it back over to Bruce, for some closing remarks.

Bruce Wardinski: Great. Thanks Ryan. So the year is off to a good start with solid top line growth, despite the setback in Jamaica from the Travel Advisory and lapping difficult comparisons from 2023. We remain focused on the areas within our control, such as our expense efficiency efforts and ongoing portfolio optimization. With respect to the portfolio, our Hyatt Ziva Los Cabos was among the first of our resorts to undergo a significant remodel, following Hurricane Odile nearly 10 years ago. While the resort has performed extremely well, we expect our current renovation will significantly improve its competitive positioning in this key market. Our other successful early higher renovations and conversions are also approaching the point in their life cycles for a refresh in the coming years namely; Hyatt Zilara Cancun, Hyatt Ziva and Zilara Rose Hall.

We are targeting these resorts for renovations next year funded by the recycling of capital from non-core asset dispositions. Given the nature of the work involved in the specific footprints of these resorts, we expect the disruption to be greater than what we have recently experienced the Pacific, which was done over multiple years. We will be back with more information on these projects later this year. But I am incredibly optimistic about the potential for our Hyatt Zilara Cancun, as this resorts sits on a prime piece of real estate and has performed well, given the limited direct supply growth. For renovation of this resort has the potential to add significant value to the portfolio. Our Hyatt Ziva and Zilara Rose Hall have been significant drivers of EBITDA since the completion of their conversions in 2016 and have a large established position in the MICE segment.

These resorts in a key market with limited supply growth in close proximity to the airport in Montego Bay also have the potential to drive meaningful value for years to come. In addition, we will consider room tower additions adjacent to our existing resorts, which should generate meaningful returns on capital and drive incremental EBITDA but that is not a high-probability near-term endeavor for us. With our ROI projects largely funded with recycled capital, we will continue to redeploy the significant free cash flow we generate into share repurchases and maintaining our market-leading assets, setting us up for success beyond 2024. With that I’ll open up the line for any questions.

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Q&A Session

Operator: Thank you. We will now begin the question-and-answer session [Operator Instructions] The first question is from the line of Smedes Rose with Citi. Please go ahead.

Smedes Rose: Hi. Thank you. First, Bruce I guess I just was interested if you could talk a little bit more about what sounds like waning demand into Jamaica. And then just kind of wondering since there’s warnings have sort of been out for a while like why do you think they’re having a larger impact in the second quarter? And is it really more sort of corporate groups that are switching out, so you’re having to sort of backfill with more transient or maybe just sort of talk about sort of the trends there and why you think that playing out this way?

Bruce Wardinski: No, it’s a great. I mean from our standpoint, we can’t really answer that. We have a very strong booking window and we see that the weakness is kind of broad-based. So it’s not just on the group side, it’s across the transient as well. If you look at the quarter, I would say, the two things that kind of jumped out to me was number one just the strength of demand, right particularly in the high season but also just the overall strength of demand. And we’re seeing it through the rest of this year. And the other one is the concern people had about ADRs and the fact that we’re not seeing any issue of ADRs. And so there are more than sustainable. And it’s what we’ve always said about the price-value relationship and value is just kind of in the eye of the Polar.

It’s still in my opinion relatively cheap and a great value proposition for people to go. So when you look at Jamaica, it really stands out from the standpoint we have this very strong demand and we’re getting good rates and why it’s so significant I really don’t know. I’ve been in very close contact with Adam Stewart, who’s the Head of Sandals and we intend to push the government do something. Quite honestly, the government is really been asleep at the switch and has not done anything proactive to address the situation. You know, sandals has a much higher concentration in the country than even we do. So we’re going to be we’re going to be pushing to see what we can do. Fortunately, what we see for the fourth quarter doesn’t look as bad as Q2 and Q3.

So that’s good news and I think again it shows the resiliency of our business particularly in the high season where we generate so much of our EBITDA, but we need to address this issue short-term. And we’re not we’re not just sitting idly by, we’re trying to do all kinds of initiatives and push it but it doesn’t make sense. I mean one of the things for example is the — the areas covered under the travel advisory are really nowhere near Montego Bay and the resort zone. So if you look at where we are located which is in on the north side of the island a completely kind of resort corridor. You know there’s not really any significant issue on. It’s on the other side of the island, the south side of the island primarily and there’s a big mountain range in between.

So we’re going to trying to communicate some of that and hopefully drive some additional business. But we’re at a loss for why it’s so significant.

Smedes Rose: Okay. And then I just wanted to follow-up, if I could just on something. You mentioned sort of at the end of your remarks about the Hyatt Ziva, Zilara in Cancun going under renovation next year. I don’t know if you can provide this but I mean I would imagine that’s one of your bigger, sort of, EBITDA generators across the portfolio? I mean can you maybe just speak to well I don’t know if you can provide what percentage it is that would be great. But can you just speak to how you were going to manage and that lower EBITDA coming out of that asset and in balancing it against the need for renovation and I think you’ve talked about a new boom tower there in the past.

Ryan Hymel: So to be clear we are only talking about the Zilara Cancun at this point. We are not referring to any renovation at this point for next year for Ziva Cancun. We’re still going through a lot of these plans internally and going through scope. And that’s why Bruce mentioned we’ll be back with more information. But what we’re specifically talking about is the potential need to target that Zilara in Cancun, which is about a 300 room property and this Ziva, Zilara Hyatt in Rose Hall. So the Zilara rough figures has been roughly a high teens almost $20 million EBITDA contributor for our overall portfolio — adjusting for FX. And so it’s a it’s a good EBIT contributor just given the number of rooms. But as you recall that property was essentially I mean I think I’ve done this before on a call, I’m using air quotes right now, you can’t see me but it was converted to a Hyatt in 2013 when we recap the company.

And since then we’ve done some things to the ancillary services like we’ve renovated the SPA. We’ve renovated the gym. We done some things to coffee shops and restaurants, but generally the rooms have just been repainted and have not been touched since we took over the property more than 10 years ago and it’s essentially lived under the umbrella of Ziva Cancun up the street. So just given its proximity to the airport, the location in the prime real estate spot in all the in the hotel zone in Cancun, it’s overdue quite frankly for renovation. And so again scope and timing will come later this year. But in the past, we have discussed potentially running it through high season or effectively Easter and then potentially closing the property down for the remainder of the year to contain any lost EBITDA for the last call it eight months to nine months of the year and reopening in time for the high season.

Again more information to come there. But that’s generally the plan we’ve discussed in the past.

Bruce Wardinski: And let me just add to that just kind of the strategic rationale. So like Brian said, it’s been over 10 years we haven’t done a room renovation. So just from normal course you would do that. But I think the opportunity here in Zilara, Cancun is even more significant. When we acquired that back in 2013, the rates that were being obtained for that type of resort in Cancun we’re good, but not kind of at the exceptional level that we’re seeing for example with our newer properties like Hyatt, Ziva, Zilara Cap Cana and even Los Cabos. So I look at Cancun being the number one all-inclusive market and the high level of demand. And the fact that is that we have a relatively limited number of rooms at Hyatt Zilara Cancun.