Hyatt Hotels Corporation (H) Earnings Call Transcript & Summary

Good morning, everyone. I'm Lillian Liao from Citi Consumer team. Thanks for joining this session. And the format today will be a hybrid one. If we were honored to have management from 2 global leading hotel chains to join us. So let me introduce the speakers today. Also on my left, we have Mr. Jason Chen, the IR Director of H World. Jason, tell me.

Lillian, thanks for the invitation.

And virtually, we also have Mr. Adam Rohman, the Senior Vice President of Hyatt Hotels, who have been leading Investor Relations, financial planning and analysis to join us at Chicago. Hi, Adam.

Good morning, everyone.

Thanks for joining us virtually. And so it's been great that actually, we're assuming our Investor Conference at Macau and also at Haiken and it's like what we're doing now, its a very strong rebound in hospitality industries this year globally, after post-reopening and to a solid ramp-up performance. So now we're in the end of the year and also looking into 2024.

We got a lot of questions about how the industry growth will look like for next year and also given the macro uncertainties and relatively high based for the run rate and also any recession impact on the pushback to the leisure spending business travel budget. So we're already keen to actually hear us from the management of their initial expectation for 2024. Maybe I tend to -- Adam first. Adam. So could you share your views on how the growth -- how actually growth in quarter you expect for higher global portfolio and strategies.

Well, thank you everyone. Before I start, I would like to remind everyone that my statements will include forward-looking statements subject to various risks and uncertainties, which can be fully accessed on the webcast of this event and on Hyatt's Investor Relations website. So to your question, I think we feel very good about where Hyatt's at today and where Hyatt is going in the future. We've been under a transformation over 6 years, as we've begun to reduce the ownership of our hotels and focus more on management franchising. We've acquired a number of different companies over this period of time, and it's truly transformed our business. We're 70% larger our loyalty membership base is 300% larger and as a global hospitality organization, we benefit from upper end travelers in high-income demographics, across all different segments. So whether it's leisure travel, which, as everybody knows, has been incredibly strong as well as group, which has been recovering over the last couple of quarters as well as more corporate business travel. We feel really great about where we are. And as we look towards a number of our metrics heading into next year, we're really excited about the prospects for the travel and specifically the hospitality industry.

Thank you, Adam. So give us some color. And so Jason, could you iterate -- show some of your views like you shared these views also, while we see actually has been leading industry recovery this year, especially in the RevPAR performance and also do expect ADR can sustain.

Okay. Yes. Thanks, Lillian. So yes, for us, because I think over 95% of our business are focusing in China market, and indeed, we had a pretty good performance in terms of the RevPAR recovery for this year, driven both by the leisure, very strong leisure demand in China as well as gradual recovery of the business traveling as well. So well, I know that there's a lot of debate on the potential uncertainty going forward. But for us, we are pretty confident that our RevPAR should be continuously improved going forward. And so far, I think from the -- our franchisee side, so basically, their confidence level has been -- quite significantly this year. As you may know that in the first half of this year, we had reached quite strong new science power franchisees, like over 1,700 hotels just for half year, which was a history called record-high for us, which is showing the industry itself in China still being very attractive. Yes.

Yes. Thank you, Jason. And so Adam, do you have anything to add for China market specifically? And any news for China, that you expect for the growth outlook?

Yes. I think for us, similarly to what you've heard before, domestic travel has been incredibly strong. We're seeing really strong business transient as well within China itself. And we're continuing to see improvements in international airlift coming from various markets into the country. So we feel really good about the recovery. We went from being kind of flat to 2019 for RevPAR in the second quarter. We just reported our third quarter results last week. Our RevPAR in China was up 20%. So we've really seen this acceleration in growth, a lot of it being driven by domestic demand, but definitely an improvement in international inbound travel. And so we feel really good about the future prospects, both for the end of this year and as we look towards 2024.

Yes. Thank you, Adam, for your comments. And also, Jason, can you give us some -- provide us some visibility for 2024. So maybe next topic, we touch some basis on the consumption trend. So Jason, so what's your observation in the changes of Chinese trends pre- and also post-COVID and like how inventory like the gradual to capture these kind of trends and depend members' loyalty.

Okay. So as of now, we have like over totally 200 million members within our membership loyalty program. And in terms of the bookings. So over 60% of the bookings come from our direct sales channel, and over 75% of our room nights sold directly to our members. So well, we have a pretty strong large base of membership program as well as a pretty loyal members within our system. In terms of the consumer behavior change, our observation for our customers before COVID and after COVID. There is a relatively clear trend that Chinese customers are willing to spend more their budget on some kinds of experience related activities, like, for example, the traveling, which is -- supports a very strong usual traveling activity this year. Like, for example, the February, the Chinese New Year, the RevPAR recovered to like 140%, to the 2019 level, as well as the May holiday and the summer holiday as well. So clearly, that -- people are willing to spend more money on traveling. And sometimes, people are more willing to go more often. Maybe spend a little bit smaller amounts of money on per trip but in total spending, we are still seeing pretty great potentials going forward.

Okay, thank you. Adam, so any interesting trends you want to share from your side. And as you remember, by the Investor Day in May and your -- the CEO also mentioned the transformation focus to the high-end traveler. So how do you see the growth potential for this customer group?

Yes. I think we're seeing a lot of the same trends where leisure demand has been incredibly strong. I think what Jason said, is very similar to what we're seeing where I think consumers are just prioritizing travel experiences more than they did in the past. I think globally, we all, going through COVID, I think probably have gained a greater appreciation for being together, whether it's with loved ones or with colleagues. And so -- well, it's great that we have the technology that I can dial-in from Chicago and do an event like this. There's -- people are also prioritizing being in-person. And so for us, especially with high-end travelers, we feel like they're less susceptible to bigger changes in the global economic cycles. They've got more spending power for experiences, especially travel, whether it's coming from the Chinese consumer or just more broadly across the globe. So we feel really confident that the prioritization of travel is here to stay and that people are just viewing those types of experiences with a higher priority over maybe goods and services than what they did pre-pandemic.

Just also just a very quick follow-up to Adam. So how do you think about the recovery of outbound and also inbound travel of China? And so what's this contribution to your portfolio?

Yes. So I'll tell you an interesting stand, for travelers coming from the U.S., we tried in the third quarter, we would get -- our hotel revenue was down about 5%, which it's down, but when you think about the amount of air capacity or the lack thereof to get to China right now from a lot of major U.S. cities, it's a pretty incredible statistic. So for instance, here in Chicago, they're just starting to restore the direct airlift on Cathay to Hong Kong. So to get to Hong Kong, you're either flying to L.A., you may fly -- have to fly to New York, have a long layover. So the time that it actually takes to travelers is even longer than it is when you're on a direct flight. So it's a slow recovery, international inbound travel back into China, but it's improved significantly. This year, it was down 60% to 2019. It has continued to grow over the last 2 quarters. In terms of outbound-travel, we're definitely seeing more domestic travel increasing to kind of inter Asia, so within the region first, and now it's starting to pick up in locations like Europe and the Middle East probably travel into the U.S. is weakest right now. But part of that is also just the back of airline capacity. So I think it will recover over time. But certainly, the trends are very promising.

So also this year, actually, China hotel industry, we also see sort of some benefit from the favorable industry supply-demand dynamics and industries also supply started to review from this year. So Jason, so how do you think about the competition landscape in China market, especially in the mid- to upscale segment?

So that's true because during the COVID, there are some statistic shows, there are a certain amount of hotel supply declined due to a hard business environment during the COVID. And I think majority of them are independent hotels, small scale in China. I think after the reopening, basically, we are seeing the supplies gradually recover as well. But certainly, the new additions of the new supply mainly contributed by a branded hotel like us and our peers as well. So this is a pretty healthy trend because if you do remember, even before the COVID actually, the whole industry is kind of a consolidation. It's increased the branded penetration ratio. This is the key trends and a key thesis, which have been unchanged even during the COVID and after the COVID as well, because we are seeing not only us, but also our peers are further gaining the market share. We are further consolidating the industry. So that's a pretty good healthy development from our perspective.

Adam, so what's your view on the competition you see actually globally and also any comments for the China aspect. We're also very keen to actually hear your thoughts, like how you compete with some local players?

Yes. I think in terms of, maybe starting with China first, I think, similar to what Jason said, this -- it took time for the whole entire development market to reopen and restart coming out of COVID, and now we're seeing really strong robust growth in our development activity. We're continuing to see deals that were paused, continuing traction and we're seeing deals that we're not quite finished, now getting open and into our system. A great example is there in Macau, the new Andaz that just opened. It's the world's largest Andaz in our portfolio with 715 rooms, an incredible property that we're so proud of. So we're really thrilled with the momentum that we're seeing in China, here this represents approximately 40% of our global pipeline for ventures opening. So it's a very important market for us. And obviously, given everything that's taken place over the last couple of years, it's going to take some time for hotels to continue to get under construction and get opened, but the trends that we're seeing look really, really good. And then more globally, I think the story is very similar. We have a lot of brands that are very popular for conversions into our system, and we see probably more of that activity especially in the United States, where the financing environment is a little bit more challenged than it has been over the last couple of years. But really for us, we're just excited about our development prospects, our pipeline is at a record high. We continue to grow at a faster rate than our major competitors. So our goal is to continue to grow our system and grow our pipeline and provide our loyalty members with more opportunities to stay with us and also to get the opportunity to engage with nonmembers and bring them into our program.

So we'd just like to discuss about the growth outlook and also consumption and also the competition landscape. So maybe before the QA session, we'd also like want to -- like touch-up some basis on the expansion opportunities. So churn ratio actually in China is still actually lowest versus overseas market. So which means that there could be upside in the consolidation, especially for leading hotel chains. So Jason, how do you see the commercial opportunities for H World. And so what will be the focus of the expansion strategy like for next year and any target on your unit growth there.

Okay. So yes, as Lillian said, the brand penetration or the churn ratio in China, even after the COVID, was still quite lower compared to the very mature market like in the U.S. And we do think China has a huge potential, plenty of room to further improve the churn ratio in probably the next 5 to 10 years. For us, we have a very clear strategy on achieving this target. So basically, for our limited service, which is mainly the economic and the middle scale segment. So as you may know that we did a corporate restructuring last year, and we set up 6 regional offices. This is only for our limited service segment to fully penetrate nationwide. So especially in the lower-tier cities or the Tier 3 cities and below, we see there is plenty of existing hotels. But a lot of them are basically operated by individuals without a brand. So basically, a lot of hotels are at very prime location, very nice building. So those hotels are definitely to be our targeted to be converted to our brands. So definitely through the original office setup, it's going to be a huge opportunity for us to fully penetrating into the lower-tier city as well as our previous weak regions as well. And in terms of the upper-mid segment, so we are also developing pretty healthily and significantly this year after introduce basically the German brands Intercity, and we had some of the showcase hotels over the last few years, and we are seeing a quite high recognitions and acceptance from our franchisees. We have a pretty good sign up this year, and we also think this area is going to be further adding some of the growth potential to our groups. Thank you.

So, Adam, what's your -- like the pipeline outlook and also like the higher latest expansion strategies and also your midterm or long term target for the China market.

Yes. So as I previously mentioned, 40% of our pipeline is for properties located in China. So it's a very important market for us. It's a market that we've been focused on for many years. We've been in China for many years. So it's not new that, we think, we would prioritize this market. I think there's a couple of different ways that we expect to grow. There is the European brand, the upper mid-scale brand that was launched in -- a couple of years ago that has seen incredibly impressive growth, there's 30 hotels open with approximately 70 more already in the pipeline. And also the big brand builder properties like Park Hyatt, Grand Hyatt in the major gateway cities have been incredibly successful for us, and we continue to have opportunities grow those brands that resonate incredibly well with both domestic travelers as well as international travelers, obviously, the food and beverage is something that we're very well known for. And so we're just -- we think there's a lot of different ways to grow and we will continue to grow in the market. It's been one of our fastest-growing markets over the last couple of years, and we expect it will continue to be an incredibly strong market for us in a place that we will continue to focus our development efforts.

Okay, great. And so maybe we started the Q&A session and see any questions from the outside investors.

I just have one question. So for your investment strategy in China, how should we think of the current consumption chain. For example, people are discussing consumption downgrade and how will that impact your strategy in China to cater it to the latest consumption chain.

Okay. So let me answer this question first. So basically, for us, we think we actually -- we are seeing some of this kind of consumption downgrade -- maybe we are seeing some of the -- from the business traveling side, some of the company cutting down their traveling budget. But for us, we are thinking actually we can be the beneficiary because if you look at our product structure, over 90% of our hotels are economic and middle scale, which are really providing affordable price to the mass market. So well, in a very extreme case, if there is a further downgrade, then as long as people are still traveling, they need somewhere to stay. So we are perfectly in this position to provide those budget hotel, economic and mid-scale, to all travelers.

Thank you, Jason. So, Adam, so anything like you want to comment from your side.

Yes. I think for us, the way we sort of think about it is we also get the benefit of international inbound travel and a lot of the key gateway cities that we're located in. So if there is some slowdown, we still expect that there's going to be a lot of investment coming into the country and a lot of demand for business travel, which we feel like we benefit from. At the end of the day, our long-term strategy as a company is measured in years. And when we think about how we're going to grow and how we're going to meet our customers where they are. If there is some type of economic cycle in the short term, we don't do it as something that negatively affects us in the long term and we'll continue to expect to see really strong growth in our portfolio in China and both in terms of new openings as well as demand for our product.

Okay. Any more questions?

Actually, I had a couple of questions. Firstly, are you seeing any difference between leisure travel and business travel. So in terms of the demand, are there any nuances? And secondly, something altogether different. I mean, in terms of bookings coming in from online travel agencies, how have you seen the trends pan out post-COVID? And in terms of the outlook going forward, if you can throw some light as well?

So to answer your first question, yes, let me answer your second question first, in terms of the online traveling agencies, which is the OTA contribution. I think, for us, since day one of the business, our Founder has a key strategy is to basically build up our own loyalty program, and concentrate on the direct sales channel buildup. So as I think I mentioned previously, over 60% of the traffic from our own channels, and the OTA generally contribute only 15% to 20% of our bookings, because there's -- hotels has seasonality, sometimes during the peak season, especially like third quarter, there's a summer holiday, there's a leisure traveling demand quite strong, then the OTA is going to contribute a little bit more. But during a normal period, which is mainly the business traveling activity driven. So we have a lot of high loyal members, they just book through our own app or through the membership program. So this is one. To answer your first question, I think for this year, in China, especially, there was a very clear trend, the leisure traveling was very, very strong. Just to mention a few numbers like the Chinese New Year holiday, RevPAR recovered to 140% to the same period of 2019, this is for us. And during the May holiday, I think it's recovered to over 130%. And during the summer holiday, which is July and August, it's also 130%. So this definitely shows some of the very strong issuer demand for this year. But for the business, I think it was gradually recovering throughout the year, year-to-date. From our own performance, we can clearly see our occupancy rate the gap between this year to 2019 was narrowing down since first quarter to the third quarter. The first quarter, we probably have like roughly 6 percentage points gap compared to the same period of 2019, but it's narrowed to roughly 2-something, 2 percentage points by the end of third quarter. So the business traveling was gradually recovering, still on the uptrend, yes.

Thanks, Jason. Adam, like any comments from your side?

So I think very similarly, we have a really strong loyalty membership program. We're driving most of our business through direct channels. Obviously, as we continue to see inbound travel, inbound international travel come into China, that's going to improve even further. So in terms of how we are driving business or thinking about our distribution channels, direct by far is the most important for us and is the majority of our business going into our hotels. In terms of kind of the different business segments, very similar, we've seen an incredible surge of leisure travel really dating back to the end of the first quarter, and it's just gotten stronger every single quarter sense, relative to 2019. And business travel also continues to look really, really strong for us. It's fully recovered on a year-to-date basis compared to 2019. A lot of the recovery has been occupancy driven in the third quarter. Our occupancy levels in China were well above where they were at in 2019, and we're seeing rate growth as well. So it's been really great to see how fast the recovery has taken hold. And I think the reality is there's still opportunities for additional growth, especially in the big key gateway markets that rely on international long-haul inbound travel.

Okay, next question.

I have one follow-up question for Adam, is that you just mentioned about the recovery of international tourists, international travel, would you please share some color about international tourists coming to China recovery now versus 2019? What could be the main obstacles for them, if not coming to China and anything we could improve in that front?

Yes. I mean I think the biggest obstacle is, as I talked about earlier, is just, air capacity to getting to certain cities. So as an example, for -- I was looking at a different visit to Hong Kong a couple of weeks ago, and it would take me 24 hours to travel from Chicago to Hong Kong, 24 hours to travel back for a day's worth of meetings. And that's just -- that's a challenge right now. But I think in other markets that are closer to China, that's not as big of an obstacle. So that will improve over time. I think we're fully confident that, as I talked about earlier, there's so much value in meeting in person and people have that desire to meet, that it will get better, and that will just provide that much more demand, I think into China. And the fact that we've seen it, you get to China, the more demand that there is coming from other countries. I think it's a very positive sign.

Anymore questions?

So I just wanted to check from a competitive standpoint, given that we are seeing, the consumer coming under a bit of pressure here. So are you seeing the competitive intensity going up in the China market? And are you taking any steps to sort of mitigate that impact from competition?

For us, we don't really see that. So again, as I mentioned previously. So as long as there's enough travelers, people are still traveling and which we think, the traveling is a natural from the heart of the people. So it's kind of -- well, just a matter of how much you are spending on the traveling, right? So as long as you have the time during holiday, you still want to travel a little bit, just go around, just depending on your budget, whether it's going to be a long haul, short haul, right, which kind of hotels you're choosing, right? So definitely, when you have enough budget, you want to have some very good resort type hotels. But when you have a little bit tight budget, you're probably going to spend more money, probably have some site viewing, travel around, but save some money on the hotel side, right? So again, for us, from the product structure, we cover all different segments. And over 90% of our offerings, the product-wise, limited services, which is really, really affordable price. Just to give a very simple example. So currently, well, even though the ADR compared to 2019 went up quite significantly. But for us, the average ADR still 300-something. So not -- so it's still a very affordable price, right? Definitely, if you have more budget, we have the upper mid segment products as well. We even have the upscale and a very small portion of the luxury products as well. But overall, I think we have enough capacity to accommodate any kind of travelers with any kind of budgets they have.

Thank you, Jason, for the comment. So, Adam, anything you want to add from your side.

Yes. I think for us, when we sort of look at the landscape and where we have hotels and where we have opportunities to continue to have additional properties. There are so many great opportunities for us in the future. So similarly, the demand outlook remains very positive. And so we think we can continue to meet our customers where they want to travel and open more and more hotels that are going to be within the price point that they're looking to spend and engage with us, whether it's with our luxury brand like Park Hyatt, all the way down to Europe. So it's always a competitive environment, but we feel like we have really great brands that are known globally and serve a lot of different customers for a lot of different purposes of visit and again, feel really great about the long-term outlook.

Can I just ask 2 questions? The first one is on the pricing trends. How confident do you feel you can actually raise prices for your hotels and your products? And the second one is on the cost front. How -- any comments -- I would like to hear your comments on a pressure on cost front, especially on labor costs and other inflationary pressures, that you can just highlight.

Adam, you start first this time.

Yes. I think as long as there's demand, the level of sustained demand for travel that we're seeing, I think we'll continue to see pricing increase, whether it's in our rooms or in our food and beverage offerings. Now we're not going to see the same level of growth year-over-year that we've seen this year. It will begin to moderate. No different than what you see in markets that are further along and from a recovery standpoint, whether it's Europe or the United States. But there's definitely still -- we still have confidence that we're going to be able to continue to grow our average rates into the future. And then from a cost standpoint, we're not seeing anything that gives us a lot of concerns in terms of the cost base. And as long as we're continuing to grow our revenues at a faster pace we're confident that hotels are able to expand margins and produce greater returns for their owners.

So, to answer your first question. So in terms of the ADR, I think for us, especially the ADR if you compare to 2019, it went up quite significantly. But again, I think, I've explained several times, though, our ADR growth was mainly driven by the product mix change as well as the product mix change as well. Basically, we keep introducing the new version of the products even within the same brand. And also if you compare it to 2019, we grew our scale quite significantly as well. If you recall that by the end of 2019, we had only like over 5,000 hotels. But now, we are operating over 9,000 hotels. So there's like roughly 4,000 hotels added during the 4 years, okay? So naturally, when you open a new hotel, well, you will have higher ADR compared to the old one because it's new design, new products. So this is mainly driven by the product upgrade as well as the mix-change. So going forward, we think that this positive impact is going to still putting in place. And next year, if you look at on a year-over-year basis, so we have over 9,000 hotels, some of the hotels are waiting for the renovation, which are not going to be contributing positively to the ADR as well. And we are continuously opening new hotels each year, which is also going to be contributing positively. So we are pretty confident. So the ADR should continuously -- in trends in the mid to long term. Second question is on the cost side, same as Adam just mentioned, we don't see a lot of pressures on the cost side, especially for us because our future expansion will be managed through asset-light model, which is more from the miniaturized and franchised model. So basically, we don't have a lot of cost pressures by using this kind of model of expansion. But at the hotel level, we think we're putting a lot of peers to our front-line staff, even during the COVID. So definitely, we will adjust their salary wages, social warfare every year accordingly. We're just trying to -- it's just quite difficult to hire those entry-level employees or staff. So we want to keep them in our system for the long term. So we will think basically, there are benefits and again there are more benefits, even during the COVID.

Okay. So maybe for the last question.

Sorry, if I miss that part, but I just wanted to understand a bit more from Jason that what's the next strategy for Huazhu, on the overseas extension, if any? And also, I'm keen to hear from Adam about the, what kind of the combined landscape, for example, in South Asia, which may be the easier market for Chinese peers to penetrate? What's the competitive landscape there? And if there is any normal development from the Chinese peer, I would love to hear Adam's comment on that.

So in terms of our overseas expansion strategy. So first of all, definitely, we're going to further improve the operation for our Deutsche Hospitality, especially in the German market to further imply our digitalization process, as well as basically optimize the entire organizations. So to achieve a better profitability, operational efficiency by extraction. And in terms of the expansion, I think definitely we are not going to use basically as a heavy model. We don't want to do any lease or any own assets kind of model. So again, we will mainly through the management contract. And we will leverage on our Deutsche Hospitality brands like Steigenberger, Intercity and seeking some of the new opportunities in other regions like, for example, the Asia Pacific or even Middle East. So this is the current strategy. But it won't be that rapid. It's going to take some time because in the next probably 3 to 5 years, the key focus from the group will be remaining in China market because China still has a very, very big potential to further penetrate and grow.

Adam, let's start with your part.

I mean I think it's whether it's South Asia or just more broadly, I think the way we sort of view our growth opportunities is, there's 650 global markets approximately, and we have a hotel in half of them. So when you sort of think about our samples relative to our global big brand competitors, we're the smallest of the group. And so we have so many opportunities in places to grow, whether it's Southeast Asia, continuing to grow in China. Even here in the United States, we recently launched an upper mid-scale brand, Hyatt Studios, that's really targeted towards secondary and tertiary markets. So to answer your question, we're looking to grow in the right places with the right owners with the right product, but we feel like there is a lot of opportunities for us to continue to grow our scale and not run into ourselves, where we still have a lot of, what we call white-space or places where we feel like there's opportunities for us.

Okay. Thank you, Adam. So I think due to the time limit, well, we now need to iterate, end the session now. Since I believe Adam and also Jason give us a lot of views into the hotel industries. And so thanks again for Adam joining us virtually and also thanks Jason presentation on site. And yes, see you next time.

Thank you all. Thank you for having me.