Hyatt Hotels Corporation (H) Earnings Call Transcript & Summary

We'll go ahead and get started. Thank you all for joining us this morning. I think this conference is really a success this year. We had record attendance. Everybody seems happy. And so far, the weather has cooperated except for the golf like this. Really pleased to have Hyatt hotels with us again this year. I think this is year #3 or year #4, they have joined us, and hopefully, it's the early stages of what's a long run with the company joining us here in Orlando. We have 3 representatives from the company. Joan Bottarini is the CFO of the company; Adam Rohman, I think I missed your name up, comes to us from IR and SVP of Financial Planning and Analysis, I believe I got that part of it; and [indiscernible] comes to us from the IR group as well. With that, Joan, take it away, please.

Thanks, Bill. Appreciate the invitation from you and Raymond James. This is a great conference and allows us to engage with a lot of different investors across the spectrum. So really, really pleased to be here. Thank you again for the invitation. This photo here, we chose it purposefully. This is a treehouse, one of the treehouses as part of the Chatwal Lodge, which is an asset that we acquired, a property that we acquired with the Dream Hotel Group acquisition. This is in the cat scales in New York. So for those of you who are based in New York, it's a couple of hour drive. So check it out. It's a beautiful property in a gorgeous setting. One of just the many luxury lifestyle and resort hotels that we've acquired over the course of the last 5 years. Our disclaimer. This will all be on our website, so you can read through this at your leisure on forward-looking statements. So for those of you who are not familiar with Hyatt Hotels, we are a global hospitality company focused on super serving the high-end customer. We operate at the top end of each segment that we serve across our portfolio. We're in 77 countries around the world with 29 brands. 1,335 hotels and an inclusive properties, over 322,000 rooms. We have the largest portfolio of luxury branded rooms in resort locations in the world. And we have 127,000 rooms in our pipeline, which is a record for us and represents about 40% of our existing base. So a lot of runway to grow into the future with our pipeline. And here is our -- the distribution of our 29 brands, each serving a unique customer base. Some of these brands were legacy brands. We have -- Hyatt has been a company for over 60 years. So some of them are legacy brands, some of them we've acquired and some of them we've built. You can see here our inclusive collection on the bottom largely with the exception of 2 brands, were acquired through the Apple Leisure Group transaction. And our boundless collection of a variety of brands primarily focused in luxury and lifestyle, and the independent collection there on the right hand side are soft brands, which have been growing significantly in the last several years. And then our timeless collection, some of those brands have been legacy Hyatt brands for many, many years. On the investment consideration side, we have really transformed the company in the last 5 years. We are now at a 76% asset-light earnings mix as of the end of 2023. That is compared to 47% in 2017, which is a significant growth. And why 2017? 2017 was when we announced the program to sell our real estate, our owned real estate and reinvest those proceeds into asset-light businesses. We've been extraordinarily successful in driving shareholder value. The sales of real estate, the multiples that we've sold that real estate for the last 5 years has been in the mid-teens -- in the mid-teens valuation, and we've invested those proceeds into asset-light platforms in the high single-digit valuation, creating a lot of shareholder value over that period of time. You'll see here that for the last 7 years, we have driven industry-leading net rooms growth, but we have also grown at a faster rate than our largest competitors in the areas of -- in addition to rooms, fees, pipeline and our loyalty membership. And we've done that through a very intentional strategy of the platforms that we've acquired and the way that we've built our pipeline and the quality of our pipeline, our organic growth and our acquisitions has all led to exceptional fees per key for us growing over the last 5 years. And our -- all of this execution is leading to exceptional levels of free cash flow. We have -- we earned a record level of free cash flow in 2023, above our outlook for the year of $602 million, and it's a record by over 50%. So that asset-light earnings is translating into free cash flow conversion for us at very strong rates. And all along the way, our capital allocation strategy is driving this growth, but also driving shareholder returns. So in the last 5 years, we've returned $2.5 billion to shareholders over that same period of time where we have acquired these asset-light businesses as well. And so in 2023, it was a phenomenal year. Our earnings call a couple of weeks ago, we reported [ $1.137 ] billion of adjusted EBITDA plus net deferrals plus net finance contracts. And we grew, as I've mentioned 7 years of industry-leading net rooms growth, we grew our rooms by 5.9%. And our pipeline stands at 127,000 rooms, as I mentioned, 40% of our existing base. On the cash flow side, I already mentioned the free cash flow that we reported while returning $500 million in the last year to shareholders through share repurchases and dividends. And we have -- I mentioned in 2017, we started our asset disposition program. And over the course of that time, we had sold $4 billion of assets in the last program that we announced in 2021. Our commitment was $2 billion over a period of 3 years through 2024. We are halfway through that disposition commitment now at $961 million of proceeds of the $2 billion. And we are confident that we will complete this commitment by the end of 2024. And what to expect in 2024 and beyond, we have announced the sale of a majority interest in our Unlimited Vacation Club program, and we have also announced a segment realignment. This will highly simplify our reporting and our business model going forward. So it has been very well received by investors. This sale of Unlimited Vacation Club. It's -- this is an exclusive club for our all-inclusive properties in Latin America and the Caribbean. We have retained with the sale of a very important royalty -- long-term royalty and management contract, which is virtually a 100% cash conversion with this transaction. So very excited about the simplified business model and more to come with the segment realignment in the first quarter of this year. We will be reporting a new segments, and we'll have incorporated the sale of the Unlimited Vacation Club into our earnings and into our results going forward. Increasing asset-light earnings mix. This latest position program and the latest commitment that we announced, we said we would be 80% asset-light earnings mix by the end of 2024. We are definitely on track. And we announced several asset sales that we are in the middle of actually different levels -- different stages of negotiation. Should we complete all of those, we'll be at 85% asset-light earnings mix on a pro forma basis. We are very focused. We have been very focused, and we continue to be very focused on growth that enhances our network effect, which means building and super serving our customer base and growing in places where our customers want to travel and also being very intentional about where they're traveling to and from so that we are building out our distribution in those areas that enhances their loyalty to our membership program -- to our loyalty membership program, World of Hyatt, and enhancing their stays with us. And all of these durable and predictable earnings are generating significant growing free cash flow into the future, which is highly valued, we know, by all of our stakeholders, including our shareholders. And so finally, I'll just end on with all of the great news that we reported with 2023 and where we expect to be in 2024 and going forward. This is our purpose. It's all underpinned. All of the great execution is underpinned by our purpose, which is to care for people so they can be their best. And we view this through the lens of each of our stakeholders, our guests, our owners, our colleagues and our shareholders. So with that, Bill, I think we'll turn it over to questions, if there's questions...

I'll ask the first question. This decision to sell UVC comes not really that long after you acquired ALG. And I'm wondering, did you -- and part of the reason for the sale is as you listed up there, was simplification of the story. But is this just a reaction to Wall Street, say, the Hyatt story is terrific, but it's too complicated. And therefore, you never got the valuation that your peers did because of a complexity issue. Is that kind of what drove that?

Well, I would say that it certainly was something that was on our mind as it related to the simplicity and -- but making sure that since the UVC, Unlimited Vacation Club, we call UVC, is so important, instrumental to the all-inclusive properties and those members. It's exclusive to those properties in Latin America and the Caribbean and is a really important guest base for our owners and the management of those properties. So it was critical that we retained that exclusivity. And also, we are managing the experience on property through our management platform. And also, it's -- as we look at the growth in the all-inclusive platform in that region that we believe there's a lot of potential for growth. So as we engaged with investors and we found a third party who is like-minded with us with respect to growing the platform and generating greater fees for us, it all made sense and has the benefit of being a simplifying business model for us, which we have recognized that it's been really well received by investors.

Joan, as you know, this is not a hotel conference, and these folks are going from here to go see an airline or go see a manufacturing company, whatever it might be. What can you tell them about the health of the consumer, whether it's leisure travel, business travel in the U.S. or globally? What are your takeaways from the current state of travel?

Well, I'll make a couple of comments, and then I'll let Adam add on to anything else that I've missed. But -- it is -- we serve the high-end customer in each segment that we operate. So our demographic has been very, very resilient. We saw across the world, the recovery coming from leisure travel, and it's remained strong and very resilient. We -- as we look at some of our resort properties on the leisure side in Latin America and the Caribbean, we're up in the first quarter pace 11%. So that's over a very strong 2023. So leisure has been very strong in resort markets. On the group side, we also see group and actually business transient, and we've seen growing momentum throughout the course of 2023. And as we look ahead, group business, our pace for group business into 2024 is up 8%. So again, very strong. We see that like corporations are prioritizing travel. And they are doing that in short term and in long-term bookings that we're seeing. So it's -- the booking curve is lengthening. So when we look out beyond even 2024, we see double-digit growth from a pace perspective even beyond. So that growing momentum is giving us a lot of confidence in the future. Business transient in different parts around the world, it has exceeded pre-COVID levels outside the U.S. The U.S. still is lagging a bit. Again, with us serving the high-end customer, this is really high-end corporate business travelers that still haven't returned back to 2019 levels for us, for our customer base. But when you look across all of those segments, part of the business traveler is we believe converting into smaller groups. So that's where we're seeing increases in smaller group travel. And part of that business traveler is being combined with leisure travel. So you see a little bit of substitution, but momentum on all segments of the business and our outlook is -- remains positive.

Yes. I think the other thing is when we look at kind of a bigger macro picture, as Joan mentioned, because we serve a higher end clientele, we're paying more attention to what's going on sort of within higher income brackets in terms of credit card spend, in terms of desire to travel. And I think there's -- it's clear that post COVID, there is a renewed or heightened focus on experiences and travel versus spending on goods and services. And we see that whether it's in our leisure resorts, whether it's in our high-end luxury hotels, the level of demand is at much more elevated levels. So as we look to some of the key macro indicators, whether it's unemployment rate, whether it's corporate profits, we're segmenting it in a way so that we're very targeted and focused on the customers that are specific to Hyatt versus maybe the broader industry at hold.

Adam, there are recessions going out in at least 2 countries right now. Any difference in performance that you can tell within those 2 Great Britain and Japan?

I mean not really. Obviously, both of those countries have had different issues and macro struggles really even pre-COVID. We continue to -- in both instances, they rely very heavily on international inbound travel in addition to their domestic travel. So for us, at least where our hotels are located and who we're focused on, it tends to be a higher-end business traveler as well as resort traveler more so in Japan than the U.K. So we're not really seeing signs of it. And frankly, just if you take a step back, we've been waiting for a recession since 2018, and we've seen good durable demand within our business. So there'll be one at some point, COVID aside and we'll manage through it. So nothing that concerns us. We're focused on the things that we can control and making sure we execute that well.

Joan, Hyatt has grown through acquisitions fairly aggressively over the last 5, 6, 7 years and maybe not had the same focus on capital returns to shareholders. Although as you sold assets, you did go back more aggressively, how should we think about capital returns going forward? And how should we think about future acquisition activity?

Sure. Let me start on the capital returns. We've returned $2.5 billion to shareholders in the last 5 years, $500 million in the last year, and we continue to prioritize it. We've actually, since 2013, returned capital to shareholders via share repurchases. Except for that one period, we were limited from doing so because of our covenants during COVID. So we continued to be very focused on that. But what we are doing excellently is actually investing in the growth of the business and building a network effect and a guest base that is extremely loyal to Hyatt and driving shareholder returns. That way is -- has been a very, very successful part of our strategy in the redeployment of the capital that we've unlocked to the asset sales. So I mentioned the high single-digit multiple on the acquisitions and the mid-teen multiple on our sales. This is extraordinary shareholder value creation. And it's helping us grow the company and delivering -- this asset-light strategy is delivering far more cash flow, 50% than the next closest year. So what that will do is create more capacity for us with the asset sales to balance that equation. If those opportunities to invest in growth, depending on the level of those opportunities and the timing, we will use excess proceeds to return more capital to shareholders than we provided in the outlook, but we'll keep you posted on what we find.

Who's got a question? I can keep going. All right. Let me ask you this. When you look at the forecast for the industry this year, underlying any sort of bullish forecast is a lack of supply growth, especially in the United States, 1%, maybe a little less. When you look at Hyatt and Hilton and Marriott and InterCon, everybody is talking about mid-single-digit unit growth. So what gives? Why aren't we seeing more growth in deliveries? Are we just shoving everything into the early stages of a pipeline. And as we look out 2 or 3 years, we should see exploding construction. What is your thought on the next several years?

Well, certainly, the fundamentals of the industry, the business, the hotels, is very strong. So there's a lot of developers who are looking at that equation of supply growth and fundamentals for actually performance of the hotels and saying, this now is the time. There are -- there has been some delays in bringing hotels out of the pipeline. So to your question about net rooms growth and where it's sitting. So that's something that we're experiencing, primarily in markets like Asia, where it takes a little bit longer and has been a little bit delayed. So that will -- as we go forward, that will definitely be a driver of acceleration into the future. So I think that's -- that is one factor to consider as we look out. And then capital formation remains a challenge in the U.S. for some developers, owners to get their properties under construction. So we have a pretty big proportion of our pipeline being full-service properties. They take longer to build. And when you think about a little bit more complexity around getting those opening, that is -- and the capital forms. So it's getting -- the outlook is getting better with respect to interest rates, the CMBS market opening up. So we're seeing that there's improving -- an improving dynamic there that will help to, to accelerate into the future. Plus our new brand, Hyatt Studios is having great momentum on signings and our visibility to more signings that will also add to the future. And that's in the sweet spot you're talking about the supply growth. So it's a great opportunity for us.

When I look at the headlines in the consumer these days, I see things about delinquent car loans and credit card challenges and things like that. But I've not seen on demand side of the hotels. And I think maybe it's a demographic issue. And maybe you could touch on what your typical leisure customer might look like? And maybe why they're not getting caught up in some of these other issues?

Yes -- serving the high-end customer base, we have -- if you look at our rates across industries and -- excuse me, across the industry and brands, you'll see the price point differential, the premium. So that customer base typically remains very resilient through cycles. And that demographic right now, as Adam said, is -- remains to be prioritizing squarely experiences. So that's the behavior that we're seeing, and that's what's showing up in -- when we look at the demand and the rates that we're able to still yield.

Any pushback on rates, Adam?

No. I mean I think the other thing too is the Richmond Federal Reserve did a study around this time last year. And basically, what they found is that the upper 20% of U.S. income demographics have seen their disposable net worth increase, I think it was 50% for the 1%. And I think it was around 35% over 2019 levels compounded for the upper 20% to upper 19%. So our customer -- their household balance sheet is significantly stronger even than what it was pre-COVID. So we just don't see the pushback on rates. We're not seeing less travel taking place. Frankly, we're seeing probably more where people might have done to -- maybe a spring break trip and a summer vacation per year. We're now starting to see a couple of bolt-on long weekends. That's where you're seeing this sort of extension of leisure travel coming from and/or I've got to go to a conference like here. I might just a bring my family and we'll tack on 2 or 3 days go to Disney, like that dynamic, especially in the higher income brackets has really taken off. And so we don't see that pushback in any of the places that we would expect to see it. [ It was Hyatt. ]

Maybe you could touch on China. And I believe you just announced a big deal in China, new signing. Certainly, we see headlines that would be doom and gloom in China, but it doesn't seem to be impacting the development pipelines or frankly, the amount of travel, domestic inbound in China. What are you seeing over there? What are you excited about in China?

We're excited that the growing momentum in the business is very strong. The domestic traveler has been bringing us back over pre-COVID levels now for a couple of quarters. It's really extraordinary that you see that domestic traveler within the country -- we're talking about the business traveler, the leisure traveler and groups. So across all of those customer bases, there is very much pent-up demand. What is also exciting is as you think about the business that we have in Tier 1 cities that are reliant on international inbound, and that is still behind 2019 levels. So we're back to 2019 levels, but still not back with international inbound. And that's a flight capacity, a challenge that remains that is building. So that's a tailwind for us as we think about '24 and beyond. On the growth side, we -- very, very strong brand reputation that Hyatt has in China, and that has actually fueled a lot of incremental interest in our brands into -- even into more into Tier 1 cities and beyond Tier 2 and beyond. We did have 2 portfolio deals last year. And we also are in a joint venture for our Urcove, our midscale brand. So we -- in both dimensions, organic growth and kind of portfolio deals, looking at building relationships with local developers who are interested in a high-end customer that we serve, tapping into the World of Hyatt membership base. And we've also had the benefit of really, really strong partners in China. The owners of our hotels, many of those are state-owned enterprises we have a really good relationship and long-term relationships with. So it's -- we're very confident long term in China.

Great. That pretty much wraps up the session. We will have a breakout session immediately following downstairs. I invite you to attend that. Also I invite you to join me in thanking the team from Hyatt for presenting.

Thank you.