Wyndham Hotels & Resorts, Inc. (NYSE:WH) Q4 2023 Earnings Call Transcript

Wyndham Hotels & Resorts, Inc. (NYSE:WH) Q4 2023 Earnings Call Transcript February 15, 2024

Wyndham Hotels & Resorts, Inc. 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 Wyndham Hotels & Resorts Fourth Quarter and Full Year 2023 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be opened for your questions following the presentation. [Operator Instructions] I would now like to turn the call over to Matt Capuzzi, Senior Vice President of Investor Relations. Please go ahead.

Matt Capuzzi: Thank you, operator. Good morning and thank you for joining us. With me today are Geoff Ballotti, our CEO; and Michele Allen, our CFO. Before we get started, I want to remind you that our remarks today will contain forward-looking statements. These statements are subject to risk factors that may cause our actual results to differ materially from those expressed or implied. These risk factors are discussed in detail in our most recent annual report on Form 10-K, filed with the Securities and Exchange Commission, and any subsequent reports filed with the SEC. We will also be referring to a number of non-GAP measures. Corresponding GAAP measures and a reconciliation of non-GAAP measures to GAAP metrics are provided in our earnings release and investor presentation, which will be available on our Investor Relations website at investor.wyndhamhotels.com.

We are providing certain measures discussing future impact on a non-GAAP basis only, because without unreasonable efforts, we are unable to provide the comparable GAAP metric. In addition, last evening we posted an investor presentation containing supplemental information on our Investor Relations website. We may continue to provide supplemental information on our website in the future. Accordingly, we encourage investors to monitor our website in addition to our press releases, filing submitted with the SEC, and any public conference calls or webcasts. We have also created a separate website at staywyndham.com to provide additional information relating to the ongoing situation with Choice Hotels. With that, I will turn the call over to Geoff.

Geoff Ballotti: Thanks Matt and thanks everyone for joining us this morning. 2023 was an exceptional year for Wyndham, marked by outstanding operational achievements and a series of record-breaking performance metrics. But before delving into our results, we want to take a moment to discuss the ongoing matters with Choice. As we shared in our public response, Choice has nominated directors with the sole purpose of advancing its inadequate, hostile, and risk-laden offer, an offer which our Board has unanimously determined is not in the best interest of our shareholders. Our Board is well constituted combining decades of experience in areas critical to overseeing the execution of our strategy including hospitality and more specifically, global hotel franchising, M&A, governance, and risk oversight.

As we’ve consistently communicated, Choice’s offer fails to address three principal concerns; FIRST, the inadequacy of the value of the offer compared with our future growth prospects; second, the significant amount of Choice stock included in the consideration mix, which would expose our shareholders to an over-levered pro forma company with slower long-term growth prospects; and third, the asymmetrical risks to Wyndham and our shareholders resulting from a prolonged and an uncertain regulatory review. On the regulatory topic, our concerns regarding the unique risks of this transaction have only increased as the process has unfolded, starting with the Federal Trade Commission’s unsolicited outreach to us in subsequent investigation even before Choice launched its exchange offer.

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Q&A Session

Moreover, State Attorneys General from Washington, Colorado, Kansas, and Vermont have also now opened their own separate investigations. The expansive second request we received from the FTC on January 11th is requiring us to provide virtually every communication and every piece of data that relates in any way to our competition with Choice. To put this into context, second requests are issued for only around 1% of deals reviewed by the FTC, and they require additional time-consuming back-and-forth discussions and meetings with the agency. Regulatory interest has undoubtedly peaked due to the continued opposition of franchisees and the Asian American Hotel Owners Association, which represents more than two-thirds of both companies’ domestic hotel owners.

In a recent AHOA survey of members who own either a Choice or a Wyndham Hotel, over two-thirds say that consider leaving were the merger to occur. The uncertain time line and outcome facing our shareholders compounded by the risk that they are left with no deal and a damaged business at the end of a very long regulatory review process is highlighted by a recent report showing that over 90% of significant merger investigations in 2023 resulted in a lawsuit by the government to block the deal or the abandonment of the transaction, with the FTC not accepting any pre-lawsuit settlements involving a divestiture or other remedy. This trend has continued in recent months with the transactions such as JetBlue, Spirit, and its merger, the IQVIA, Propel merger and Amazon’s proposed acquisition of iRobot, all of which were either blocked or now face significant delays and challenges.

The potential value destruction that could arise from this ongoing and elongated process remains significant. Choice continues to try to take advantage of the uncertain time line and outcome to exploit franchisee uncertainty for its own competitive advantage. And Choice’s unsolicited offer also has significant real dollar costs for our shareholders, currently estimated at approximately $75 million, which includes approximately $15 million related solely to the FTC review. More fundamentally, as our 2023 results and longer-term progress demonstrate, Wyndham is positioned to generate shareholder value well in excess of Choice’s current offer. Over the last three years, we’ve consistently grown our system, our market share, and our earnings, while also expanding our pipeline to support future growth.

As Michele will cover in further detail, our strategy, which is well underway, is expected to generate an organic adjusted EBITDA CAGR of 7% to 10% over the next three years. We also expect to produce over $700 million of excess cash over the next two years. This resilient cash flow, along with our incremental leverage capacity, assuming only a 3.5 times net leverage ratio could generate a total of $1.4 billion of excess liquidity, which can be deployed strategically for both organic and inorganic growth opportunities, further supporting additional value creation for Wyndham shareholders beyond our 7% to 10% EBITDA growth expectation. And now on to the results. We were extremely pleased to report another strong quarter with a host of record-breaking full year metrics.

We opened 66,000 rooms, the largest year of organic room additions in Wyndham’s history against the backdrop of hotel transaction volumes nearly 50% below last year, which are important to our business since each time a hotel transacts or changes hands, the new owner has a brand decision to make. We achieved this success despite the distraction over the past 10 months caused by Choice. Our global retention rate, which includes all terminations, reached 95.6%, a 30 basis point improvement year-over-year and an over 250 basis improvement since our spin-off. With the growing support and the growing engagement of our franchisee community, along with investments that we’ve made in our brands, we’re now within reach of our targeted 96% retention rate, and we expect that our direct franchising retention rate will continue to improve.

We delivered 3.5% of net room growth with Q4 marking the 12th consecutive quarter of organic net room growth. We grew our development pipeline for the 14th consecutive quarter to a record 240,000 rooms. In our brands, all powered by Wyndham Rewards ranked number one by USA TODAY for six consecutive years, continue to grow their market share with our economy brands outperforming the STR US chain scale by another 60 basis points, helping to drive 5% global RevPAR growth in constant currency along with 7% growth in Wyndham Rewards membership to a record 106 million members. Full year adjusted EBITDA reached an all-time high of $659 million and we generated $339 million of free cash flow in 2023. We also returned over $0.5 billion to our shareholders, representing over 8% of our market cap from the beginning of the year.

Our owner-first philosophy continues to attract a wide variety of franchisees to the Wyndham portfolio of brands. We opened an average of two hotels each business day in 2023, and the 500 hotels we opened this year were 11% more than the number we opened last year. In the process, we introduced 13 of our brands in 24 new countries around the world, including our first La Quinta in Ecuador, our first Super 8 in the United Kingdom and our first Hawthorn suites in China and all of these brand launches in new countries can support more hotels from each brand going forward. And more importantly, we’re sold on a direct versus a master license franchising basis with no royalty share, driving international direct net room growth in excess of 10% along with a 30 basis point improvement in our international royalty rate.

Our teams awarded 864 contracts globally for approximately 104,000 room additions which was 30% more than what we signed back in 2019. In Q4 alone, we executed 33% more contracts domestically than we did back in 2019 when transaction volumes was over 30% higher than it was this year. And Q4 signings internationally increased by 35% year-over-year and by over 30% compared to 2019, with the largest increase coming from EMEA, our global region with our second highest RevPAR. Our development pipeline increased 10% year-over-year to a record 240,000 rooms. Mid-scale and above brands in the pipeline increased 6% to a record 170,000 rooms and now represent nearly 70% of our pipeline. Our pipeline represents approximately $125 million of royalty fees over the next four years, with domestic hotels weighted more to upscale and higher RevPAR brands and with our international pipeline concentrated in higher RevPAR regions like Europe and Latin America.

These RevPAR accretive rooms will come into the system over the next 4 years with fee PARs, on average, 30% higher than our current system average, providing us with another tailwind for growth that Michele will cover in more detail. Echo Suites by Wyndham, the industry’s fastest-growing new brand launch, grew by nearly 60% in 2023 with over 33,000 rooms now in our development pipeline. During the fourth quarter, we began to selectively award contracts for the brand to experienced individual developers in addition to the many institutional developers, we have contracted with thus far. We have nearly a dozen Echo Suites now under construction which we expect to open by year end and 75 are expected to be opened by the end of 2026. Last month at the Americas Lodging Investment Summit, we announced a new partnership with SBE Entertainment.

We’re combining SBE’s unmatched culinary and unmatched lifestyle experience with Wyndham’s distribution and technology platform to fuel Project HQ’s development under our growing registry collection Hotels brand. This partnership expands our platform, and it fills a white space in our portfolio for hotel owners searching for a differentiated yet approachable lifestyle brand that will immediately benefit them from the scale and the resources of the world’s largest hotel franchisor. Project HQ plans to open 50 registry collection hotels by 2030, delivering approximately 7,500 rooms designed uniquely for what millennial and Gen Z travelers are seeking. The partnership represents the latest example of our shifting mix to higher RevPAR segments, and increasing fee PAR at a faster rate than our system average.

US RevPAR, which was down 4% year-over-year, increased 10% versus 2019, which is a 120 basis point acceleration from Q3 performance. Q4 trends represented a continued moderation of the revenge leisure travel that we saw last year, which largely favored select service chain scales. Internationally, Q4 RevPAR was 7% higher than last year in constant currency and 44% higher than Q4 of 2019, relatively consistent with the strong performance from Q3. In our quest to maximize franchisees’ top and bottom-lines and to improve owner engagement and retention, this year, we implemented a number of innovative tools. We developed Wyndham Community, a state-of-the-art mobile-enabled platform that seamlessly connects our owners to the day-to-day performance of their hotels while delivering a constant connection to Wyndham’s scale and resources to help maximize their profitability.

We delivered a segment-leading guest engagement platform, allowing our franchisees to sell room upgrades and services like early check-in and late checkout, along with beverages or snacks and other local amenities for in-room delivery, upon a guest’s arrival, a first for select service hotel owners that will provide significant incremental room revenue opportunities for them. We completed the rollout of our mobile next-generation property management systems at unprecedented pricing from best-in-class suppliers, which drove RevPAR increases of over 170 basis points on average for franchisees using these systems. And we provided an OTA commission reconciliation tool, helping to put thousands of dollars back into the pockets of franchisees on a monthly basis by reconciling OTA bookings that either never show up or that depart early.

Before handing the call over to Michele, all of us at Wyndham would like to take a moment to honor the passing of an industry icon. In late December, we lost Ron Rivett, Co-Founder of the Super 8 brand. Ron leaves an indelible mark on the industry with the creation of Super 8. We acquired the brand in 1993, and by following Ron’s owner philosophy of being available, of being approachable, and being accountable, Super 8 is now the largest economy brand in the world with 2,663 hotels in nine countries. We’re honored that not only is the very first Super 8 in Aberdeen, South Dakota, still in our system, but it’s also run by Ron’s family, who keeps his memory and his dedication to this industry alive every day. And as we commemorate Super 8’s 50th anniversary this year, we will celebrate Ron Rivett and his many accomplishments.

We would also like to extend our heartfelt appreciation to all of our team members and all of our franchisees. Our record-setting achievement would not have occurred without their dedication and their support. Their enthusiasm for the opportunities that lie ahead, coupled with their commitment to our initiatives to deliver exceptional value remains the key to our success. And with that, I’ll now turn the call over to Michele. Michele?