Hyatt Hotels Corporation (H) Earnings Call Transcript & Summary

Good morning, everyone. I'm Mike Bellisario. I'm the senior analyst at Baird, covering the hotel brands. Today, we have Hyatt Hotels Corporation with us. Joan Bottarini, Executive Vice President and Chief Financial Officer; and Noah Hoppe, Senior Vice President, Financial Planning and Analysis and Investor Relations. If you do have questions, send them to [email protected]. They'll come to me. I'll turn it over to Joan for the first couple of minutes. She's going to do a quick introduction, and then we will jump into Q&A. Joan?

Thanks so much, Mike, and thanks to Baird for inviting us to the conference today. Good morning, everybody. I just wanted to provide for those of you who don't know much about Hyatt Hotels, we are a global hospitality company. We have been in operation for 60 years, and we have about 1,300 hotels as of the end of the first quarter and 300 -- over 300,000 rooms in operation globally in 75 countries around the world. So we serve -- we're differentiated and serve the high-end customer base in each segment that we operate. Over 40% of our hotels are luxury lifestyle or resort hotels in our portfolio. And for the last 6 years, we have recorded and posted industry-leading net rooms growth. So we have grown faster than our competitors for the last 6 years. Last year, we posted 6.7% net rooms growth. We have 117,000 rooms in our pipeline, a record for us. About 40% of those are under construction, expected to open in the next couple of years. We are -- have been under a transformation for the last 5 years. We have been headed on a journey towards an asset-lighter business model. And about 5 years ago, about 47% of our earnings came from asset-light earnings. And as of the end of last year, 75% of our earnings came from asset-light businesses. And you see here on this slide that we're on a path by the end of 2024 as we complete a current commitment that we have to sell down additional assets, we anticipate being 80% mix of our earnings being asset-light. And all of that transformation is leading to significant free cash flow. We generated $473 million of free cash flow in 2022, which is 50% greater than any previous year on history for us. So a great outcome for us and a very exciting time for Hyatt, both our growth strategy, our transformation and as we look towards the future, the possibilities for us to continue to grow.

On that same topic of the last few years of transformation, you just had an Investor Day in Mexico a few weeks ago. I mean why did you pick Mexico? Why that property? And what was the message that you were trying to get across the analysts and investors there?

So maybe, first of all, I'll talk about the content, which is all posted on our website for anyone who would like to go deeper into the content and the presentations themselves. We have not had an Investor Day since 2019, four years ago. And so given some of the successful progress we've made on our transformation and following on the commitments that we made during that Investor Day in 2019, we really wanted to just hit on all of those key points of that transformation, that asset-light transformation that we've been on and the fee-based earnings growth that we have been able to realize over the course of those four years. So we spent a lot of time talking about our asset disposition progress and our investments into asset-light businesses as part of this really acceleration of our fee-based earnings. And we talked a lot about how we've generated shareholder -- significant shareholder value through the combination of the value we have realized through the asset sales at 16x multiple on $3.8 billion of net proceeds that we recognized from asset sales and invested those proceeds into asset-light businesses at an 8x current multiple. So generated significant value between the 16x assets sold and the 8x on the acquisitions that we've undertook in the last four years. So we spent a lot of time talking about that transformation. And we also talked about the ALG business, which is the largest acquisition that we have undertaken. We closed on that in November of 2021. And all asset-light earnings and a very, very exceptional way for us to enter into the all-inclusive space, we are now the greatest global luxury provider of all-inclusive resorts in the world. So that acquisition was transformational. The platform, we talked about the asset-light earnings coming from the platform that we acquired with ALG, and we actually had some leaders from the company actually go a little bit deeper into the business model and the network effect that the platform has generated over time and for Hyatt as we combined the operations into the company and are really working together to demonstrate additional growth into the future for the all-inclusive platform and for Hyatt and its World of Hyatt members. We also talked about our commercial engine and our World of Hyatt program, which has grown by 260% over the last five years. As I mentioned, the acquisitions that we've undertaken, we have expanded into additional geographies and additional products, brands that have allowed us to expand opportunities for our World of Hyatt members to stay more with us. And it's really expanded the program significantly over those past five years. So we talked about our commercial engine. We talked about our World of Care program and how that's delivering financial results and really strengthening our relationships with our ownership groups who are also very committed to these programs, talked about our growth strategy, our industry-leading net rooms growth and the launch of our most recent brand, the extended stay upper mid-scale brand, Hyatt Studios, launching in the Americas. And finally, I provided an outlook for 2024 and 2025, really to highlight and emphasize the -- what I mentioned earlier is our free cash flow progress and our expectation that, that $473 million from 2022, we anticipate will grow to $750 million of free cash flow by the end of 2025. So we also provided a growth model for the business during that session during Investor Day because it was really important as we're undergoing this transformation that our growth model has evolved and the asset-light nature of it was, I think, important to advise investors and analysts on how the business will evolve into the future. So it was a wonderful opportunity for us to provide all of that content and really talk about the exciting progress that we've made. And we did it at our Impressions by Secrets Resort in Playa Del Carmen, Mexico really importantly because the luxury all-inclusive product, we found that actually having more exposure for guests is really accelerating the interest and demand into that segment. I know, Mike, you were there. And we received incredible feedback from a number of analysts and investors who joined us live, who had really experienced the product and the service, who had not experienced luxury all-inclusive and said, "This is an incredible product. We're really enjoying the service, the quality of the food." And that was intentional, obviously, for us to really introduce more guests to the platform because over the course of the last 5 years, the demand has grown significantly into that market. And we believe that once you stay, you're going to want to come back. So that was the reason behind having it there and a summary of the content.

All work, no play when I was there. Just on the 2024 and 2025 outlook, what are the underlying fundamental assumptions that you guys have embedded in that model? And then maybe what gave you the confidence to give us a multiyear view to the business today?

Yes. So within the 2024, 2025 outlook [ some important ] drivers that we provided is RevPAR and net package RevPAR growth between the ranges of 3% to 7% in each of those two years. And the reason we feel that that's reasonable and achievable, if you look at the first quarter of 2023, if you think about our business really in three segments: leisure transient, business transient and group. And if you start with business transient in the first quarter of 2023, that's still only 85% recovered in terms of revenue. But in terms of room nights, that's still down over 20%. If you think about group, that's fully recovered in terms of revenue but still down in the double digits in terms of percentage of room nights. And then if you think about leisure transient, that's up in rates, but that's pretty much just tracked along with CPI, if you will, over the course of the last 3 to 4 years. And then demand or room nights is just getting back to 2019 levels. So as we look at where do we grow from here and why that's reasonable and we think an achievable range in terms of assumption, we look at room nights. And we see that we are still down 450 basis points in terms of global system demand. And then when you step back and think about that demand that has yet to recover and contextualize it with broader macro growth, so you think about GDP, nonresidential fixed investment, those are typical core demand driving macro metrics, if you will. Those are up between 15% to 20%. So that makes that even more powerful when you think about, for instance, business transient demand down 20%, and those core drivers up 15% to 20%. There's a lot of room to go on the demand side. So we really think that the growth is there, and what we look forward is a range that's very reasonable.

And then you outlined $3 billion of free cash flow, including asset sale proceeds over the next couple of years. What are the top capital allocation priorities today? And 1, 2 and 3 on the list of things to do with those dollars?

Look, as we think about what we're going to do going forward, we should just repeat what I said about what we've done, what we've accomplished in the past 5 years. So generating $3.6 billion of net proceeds from asset sales. We have reinvested in the company as a priority into asset-light businesses with complementary guest profile amongst the businesses. We've actually expanded our guest profile, but in adjacent -- in ways that are adjacent to our current World of Hyatt membership base in our core guests. And also, we've invested in opportunities that have an embedded pipeline. And so that's really important because that's an ongoing annuity for us. We are able to build these platforms. We have -- for the acquisitions that we have completed, we added 50,000 rooms to our portfolio, and there are 20,000 rooms from those acquisitions in our pipeline. So an important element of the way we intend to grow going forward. So as we think about the extra cash, back to your question, Mike, the -- sorry, going back, we also returned -- along the way, in those 5 years, we returned $2 billion to shareholders. So as we think about going forward, we look at those same criteria for acquisition or portfolio type opportunities that we may deploy that capital, but we intend and have every intention to continue to balance that with return to shareholders.

And then on the asset sale program, I mean, what continues to give you confidence that you can hit your target by the end of next year? And then what are your -- what's your team seeing in terms of the transaction environment? Obviously, interest rates are higher. There's a lot more uncertainty post-SVB collapse. Have you changed your expectations for timing, proceeds, which assets to sell, and how have buyer expectations potentially change too?

So maybe just going back to our commitment. We have, over the course of the last five years, made a couple of commitments over time. Our most recent one is $2 billion of proceeds from asset sales. We have about $1.3 billion to go by the end of 2024. And right now, we have two assets that are in market, and those are in process. One of them is under an LOI and the other one is making progress. So we're very active right now on the asset sale front. And we have 100% confidence that we are going to meet our commitment of the $1.3 billion. And the reason why, again, this is in the investor materials that we posted, is the quality of our asset base. There are no, what I would call, assets that are -- that wouldn't -- we wouldn't consider selling, but it's to the right investor buyer. And we have a diversity of assets in our portfolio between resorts, group hotels, high-end luxury cachet hotels. So when you think about the diversity of the products and segments that those properties are in, you can imagine the diversity of the investor base. So many times, these assets trade, and they're all cash transactions. So not reliant on debt financing and have a variety of buyers -- the buyer pool that we can tap into. So we feel extremely confident because of the quality of the base and the diversity. As far as the environment and the financing environment, it's definitely a consideration for buyers. And as I mentioned, we've had a lot of all-cash sales transactions. So it will be something that we manage through as we look to completing these assets that we have in market and the future assets that we bring to market. So I think there's options and we'll see what happens with interest rates.

And are there certain types of assets that are easier or harder to sell today versus others?

Last year -- so as we completed $700 million of the proceeds, those assets, we realized very attractive multiples on and many of those were resort locations in the U.S. So we were able to really capitalize on the strength of leisure travel and the fundamental operating performance of those assets and the buyer pool being very interested in that segment. Now as we look at how group, what Noah was describing, about the momentum that we're seeing now in group, that's really a new category that is catching attention and has a lot of potential for growth into the future. So that could be the next opportunity for us as we see this as we head further into recovery.

Switching gears a little bit. You mentioned ALG. Maybe how big can that business get? And what's the white space globally for all-inclusive today?

The management business right now, we have over 110 hotels, and a little over half of those are in the Americas. Those are larger hotels in the Americas, larger hotel all-inclusive properties, Latin America and the Caribbean. And then we have about 50 hotels in Europe in the south of Spain and a couple in Greece. And so as we have integrated the platform, introduced the development community for the all-inclusive product to the existing Hyatt development community, we're already seeing the interest that, that cross-pollenization is creating for us and the amplifying effect of bringing these two organizations together. The global opportunities for all-inclusive are vast. There has been a lot of interest in markets that hasn't -- that haven't even had introduction to all-inclusive. Our positioning and expertise as the global leader here in the luxury all-inclusive space is really catching attention to developers. It's also very fragmented in parts of the world, like Europe, where there's a lot of family-owned smaller portfolios who are seeing the benefit of joining a large system, the scale that is provided, but also the expertise that's provided from the management side. So we have a lot of opportunities for growth. And the business actually has grown significantly, 50% from 2019 to 2022 alone. A lot of that has come from Europe as we've expanded significantly in Europe, but it has grown significantly. It has a very strong economics for the owners. So it's really catching attention of the investor community that is not currently in the space, and there's a very dedicated investor community that already is -- continues to build multiple all-inclusives in their own portfolio.

And real quick, Mike, just to add to that. As you think about global luxury all-inclusive, so Hyatt has about 33% of that worldwide market share. And if you look at the concentration, around 80% of that global luxury all-inclusive is concentrated in Mexico and the Caribbean. So that gives you context of how big of a market opportunity there is outside of Mexico and the Caribbean. It's almost nonexistent throughout Asia Pacific, just starting to, I would say, pick up in Europe as we've started to grow there. And then the Middle East, also a huge opportunity. So as we look -- Southeast Asia is another one. So as we look across the world, we see a lot of markets where this could be very attractive. And the other thing that I think, from an earnings standpoint, that's very interesting is if you look at just the market of Cancun, the broader Cancun market, we have over 25 resorts just in that market. So as we spread and grow, it's not so much just plant one hotel and one market and move to the next market. In these resort markets that are true destination locations, we have an array of brands, and you can actually plant multiple flags and drive unique network benefits within one market, which means the overall aggregate opportunity is significant.

Does all-inclusive work in the U.S.?

It can work in the U.S. It's -- looking at the model very closely and the rate dynamic, we are evaluating what markets it might work in. It has grown significantly in popularity, now that the exposure has been broadening, particularly for the luxury all-inclusive product. So that's -- stay tuned. We're taking a look at that.

So there's some benefit from U.S. citizens going to Mexico, getting exposure to the properties and then a dot on the map and Florida shows up, right? There's a synergistic benefit there I presume?

In a UVC, unlimited vacation club program with a significant amount of members that reside within the United States as well.

Sure. Fundamentally, maybe can you talk about current demand trends? What you're seeing on the ground today? And then also maybe kind of go around the globe, too.

Yes. So I think what we're seeing is very encouraging and a continuation of what we have been seeing with the continued recovery. I think the only one interesting part is we are seeing normalization of demand. So if you think about last year, Omicron created some real distortions in travel patterns, which basically meant that there was a large amount of travel that did not take place in the first quarter of 2022. Those vacations happened, they just happened over the second and third quarter throughout that year. So you do see some normalization of that trend. You can see that in Smith Travel data happening throughout April and May, which is to be expected. But when you step back and look at leisure demand in aggregate, it's broadening. You're seeing more of it in urban markets. You're seeing more of it head over to Europe, and you're seeing cross-border travel recover more fully. So we feel great about where leisure is at. And then group, as Joan mentioned, is really exciting how that continues to unfold. So we're seeing the lengthening of the group booking window. You're seeing more associations start booking. They're booking further in advance, which are all signs of, I would say, group health and what we were hoping and expecting to see is happening. So as we look to 2024, again, getting back to our confidence in our illustrative view we put out for 2024 and 2025, we've seen group pace pick up and grow meaningfully. So just several months ago, as we are looking at group for 2024, it was down several percentage points. Just last month, that jumped to being up plus 3, in the amount of what we call tentatives, which is groups likely to book, is pacing significantly ahead. So we're seeing a lot of really exciting trends in the group space. And just to add why that also makes us optimistic is there's virtually no supply of large hotels being added in the United States. If you look at the number of luxury and upper upscale rooms under construction that are larger than 400 rooms, the type of hotels that take large groups that have meeting space, there's like just over 10 projects in the United States in aggregate under construction. So this dynamic has real potential to play out, and I think be very positive, especially for Hyatt when you think about our group exposure in the United States in full service is around 40% of our revenue comes from group. So we're very optimistic on that front. And then I think from a business transient standpoint, commented that room nights are still down in that 20% range. We have a larger exposure to large corporate business transient travelers versus small and medium enterprises. The small and medium enterprises are largely back to the 2019 levels, large corporates, think of Big 4 accounting firms, consultancies and the like. That's kind of been that slow and steady improving demand over time, and we continue to see more and more travelers come online and reestablish business travel patterns. I feel like at this conference, a lot more people I see here this year than last year. So you are just seeing more of that behavior kind of look and feel a little more like pre-COVID as each passing month goes. And I think we can expect that to continue as time goes on as well.

And then maybe -- I'm going to dig into China next.

Yes. So what Noah was describing about the normalization is sort of what we're seeing in the U.S., which really led the globe in the recovery. So as we look, comparisons to 2022 are leveling out a little bit from a growth rate perspective because of the surge that we saw last year post-Omicron and these sort of nontraditional seasonal growth that we saw over the second and the third quarter of last year. So that's what we'll see this year. And in the U.S., there's a moderating, but still strength relative to 2019, still feel very confident about the continued growth of business travelers and group, particularly in the U.S. When you look across the world, and I'll get to China in a minute, our numbers for Europe were up 30% in the first quarter. They continue to be exceptionally strong, the business there. And this is -- Europe is back -- business transient is back to 2019 levels. So they're seeing a little different patterns with respect to leisure. Europe less concentrated in group business but growing as well. So very strong in Europe. We had some events in the Middle East that have been really helping us. So still world events are still very much contributing meaningfully to demand in certain regions around the world. India has been a strength as well, growing very significantly over 2022. China is really where there's significant tailwinds. We're seeing very encouraging results coming from the first part of this year. But as we look forward, the dynamic that we're experiencing is going to prove to be additional tailwinds going forward. So the reasons why our China has -- Mainland China has returned back to 2019 levels and above in the first quarter, and that is primarily all domestic demand in the country. So when you look at it by city, you're seeing domestic demand going to the leisure destinations, places like Sanya, are very strong. And the large major cities where we have significant distribution have been on the lagging side of the equation. But again, overall, the country is above 2019 levels. A lot of that is driven by demand, domestic demand. International inbound is a significant contributor to Chinese business and to the country GDP. So the motivation to get those international travelers back into the country, they are high-rated travelers. They go to those major metropolitan cities. Flight capacity continues to be a constraint. They -- in many markets in Asia, they're at 30% to 50% of flight capacity out of their airports. So as this builds, this will continue to be a tailwind for us. It's just going to take some time. And you may have heard about some of the passport constraints in the backlog, that's easing up. That is, again, motivation from those government agencies that are saying, we need to get this travel flowing and moving it as fast as they can. It will take some time, and it will just be a tailwind for us going into the future.

And then last topic on net unit growth in the development pipeline. You introduced a new brand, Hyatt Studios. Where does that fit in terms of the price point for you guys? And then a lot of your competitors also have introduced new brands. How do you think about the competitive environment in the lower-end chain scales today that everyone seems to be introducing new brands into by the week?

Great. So this is -- I don't think we have a lot of time, and I'd love to continue to talk about this in meetings after this for people that join us. But Hyatt Studios is really entering for us a differentiated space. So when you think about the high-end customer that we serve, this is the upper mid-scale, so adjacent to upscale where we have our Hyatt Place, Hyatt House and Caption brands. So this is an adjacency that we identified. We are underpenetrated in these markets, and it's by a wide margin. When we looked at the data in markets that we operate, we have four hotels in markets that we operate. Our competitors have 14. So the -- our penetration is much lower. There's a large gap. And when you consider Hyatt Studios and these markets that we are underpenetrated, we also found out, when we looked at the data, that our World of Hyatt members, when they're not staying with us, it's because there's not a Hyatt within 5 miles of where -- of the destination that they're going to. So this is an opportunity for us to continue to deepen that length or that engagement with our World of Hyatt members and have them spend more with us and stay in more locations with us. So the Studios brand fits right into that because of the price point and because of the cost of construction. It's in these markets where those guests want to travel and they want to stay with us. It's also an opportunity for us to bring in members that -- new members to the Hyatt portfolio and to the World of Hyatt program because we have the most aspirational portfolio for loyalty programs, hands down. Our mix of luxury lifestyle resort properties, aspirational properties, place -- ways to use your points, this is now an entry point for people who are traveling in those markets to become a part of the program and have a very diverse and broad opportunity to use their points.

Thank you, Joan. Thank you, Noah.