Hyatt Hotels Corporation (H) Earnings Call Transcript & Summary

Great. Well, good morning. Thanks, everybody, for attending. We're thrilled today at the Wells Fargo Annual Consumer Conference to welcome Hyatt. Today, we have CFO, Joan Bottarini; and VP of IR and SVP of IR and FP&A and a host of other functions, Adam Rohman. So look, I think that -- the way I'm hoping to structure this, I've obviously a preset list of questions, and then we'll leave the last 5 or 10 minutes to open it up to the audience, if that works.

Great. Let's start with an easy one, high level. It feels like the U.S. outlook is continually evolving at this point day by day, rate environment, the macro, the U.S. consumer. I guess as you look across your portfolio, I mean, where are the pockets right now in the last 6, 12 weeks that you're seeing the greatest overall strength? And what areas in lodging do you maybe envision that you look out having most growth for 2025? I mean, are there any areas where you would call it trends starting to normalize or soften? Just kind of start high level.

[Audio Gap] for the conference. This is our first time to your conference. So it's great to be here and nice to meet you all. Our portfolio, we have over 1,300 hotels in 76 countries around the world and a large concentration today in the U.S. where our pipeline, which is significant, industry-leading as a percentage of our existing base with a lot of that growth internationally. But your question was on the U.S. and the demand that we're seeing in the U.S. And as we, over the past couple of years, have seen recovery to very elevated levels above kind of pre-COVID on the leisure side. Last year, well over 20% greater than those levels that we saw pre-COVID on the leisure side. So a big surge and leisure kind of leading the recovery. So where we are now is a bit more of a normalization to last year's levels, which is really encouraging. So really great demand from leisure and continuation of that demand that we're seeing this year and that we reported through the second quarter. What has the customer segments in the U.S. that have been slower to recover has been the business transient, that individual business traveler and group. And group had, through last year, reached about flat to pre-COVID levels. And so that was the next -- that's the next segment that we saw really gaining momentum into this year. And for this year, we're seeing mid-single to high single-digit growth in group business. And that's in the U.S., really great for us because we have 35% of our business-plus in group revenue with large group hotels. So that's really been strong for us. And we continue to see that with pace through the rest of the year into the mid-single-digit range. The business transient traveler has been the last customer segment in the U.S. to recover. And within the individual business traveler segment, you have your small and medium enterprises, smaller companies that kind of came back first and the large corporates have been coming back this year. The momentum that we've seen from large corporates, which is we, in the industry, serve that guest base to a larger degree because of the quality of our asset portfolio, guest base, the mix of upper upscale and luxury properties that we have. So we've really been able to capture a lot of that growing momentum on the business traveler side. And we've seen it, actually, into post Q2, continuing to gain momentum. So it's really encouraging. We're back to school, back to the road and a lot of urban markets for the business traveler. So on all dimensions, pretty healthy and solid growth. As we look into next year, we see a continuation. Group pace for next year is in the high, I think we've reported 7% or 8% high-single digits for next year. So continuation on corporates, a big proportion of the group business continuing to book and rates meaning average daily rates at the property level for group being strong, still a significant proportion of the group revenue that we're realizing. Business transient going into next year. We have less visibility. The booking windows are shorter, but we have no reason to believe that there's any slowdown there. Our corporate customers are telling us they continue to prioritize travel and leisure. Some of the important data that we look at is what's booking into festive, into the fourth quarter and into the holiday season? And we're seeing growth into the fourth quarter and the holiday season. So we got a lot of data that continues to give us encouragement about ongoing growth and resiliency on each dimension of our customer base.

Yes. And maybe just one thing to add, too, is that when you think about next year, especially, we have easier comparisons from some of the big renovations that have been taking place this year. We talked about on our last earnings call, we've had a number of very important resorts in the U.S. that are undergoing renovations to be up-branded. The Confidante Miami Beach will become an Andaz. Hyatt Regency Scottsdale at Gainey Ranch and Hyatt Regency Indian Wells and Palm Springs will both become Grand Hyatt. So definitely some disruption that we've seen to our leisure domestic results this year that we'll be lapping next year. And then as the situation in Maui continues to evolve and hopefully improve, that could certainly be a tailwind for us from a leisure standpoint in the U.S.

Do you think that from what you're seeing today, and obviously, the leisure booking windows are not necessarily as long as group, but do you feel like next year could be better in terms of the leisure set up, just given some of the idiosyncratic things you're lapping as well as maybe kind of coming off of a normalized base this year? Do you think we could see growth kind of improve off of kind of this flat-to-low single-digit pace for your portfolio for that customer or...

I personally believe we can. I think some of what we've seen this year is a changing preferences in location. I mean Europe has been off the charts this year for us, double-digit growth -- excess double digits. So that is sort of speaks to the resiliency of leisure travel. And our customer base, we serve the high-end customer in each segment, is traveling and they've been traveling in droves to Europe. We think a little bit of that has been displaced from Caribbean markets in the summer season, which has helped -- our diversified portfolio helped it in Europe, and we've seen a little bit moderating in the Caribbean. And when you look -- so I'll just speak -- a lot of the comments that Adam and I just made directly in reference to the U.S. When you look outside the U.S., I spoke about Europe, but in Asia, the other data point to provide around resiliency of travel and the leisure consumer is what we're seeing in China. China has been softer. It came out with a boom in the first quarter. We were double digits up in China RevPAR growth. And then we saw some pull back in the second quarter. And yet the consumer in China has been prioritizing travel and traveling outside the country. So the outbound Chinese consumer into other markets within Asia has been very strong and into leisure destinations. So kind of on a global basis, that traveler and our particular demographic traveler that we serve remains healthy.

If you think about China, right, and there are nuances, right, between the Tier 1 cities and then there's outbound. I mean how do you think about the health of that customer 3 months -- now versus 3 months ago? And do you feel like we're at a point where we're stabilizing? Because we've seen the autumn festival like there's people traveling in droves, it just doesn't seem to be driving much because of the mix of where they're staying or if they're going outbound. So I mean, is the expectation that we can kind of stabilize in terms of RevPAR at these levels or do you think we still have to get through some very tough comparisons from the prior year at this point?

Well, there certainly were some tough comparisons going into the second half of last year when travel rebound -- started to rebound. And of course, we saw the first quarter. There's been this pullback. There's also been, call it, a limitation on spend, ancillary spend. So our business in China, we've been there for well over 50 years in the region. And we have an incredible reputation and very, very strong brand recognition there. So it's also true that half of our revenue base is outside of room revenue. So our hotels operate in markets where F&B -- the restaurants in those hotels, the banqueting that we provide, the ancillary spend, weddings, all that is -- has pulled back a bit because of what -- some of what's come from the government around spending on those types of things from government officials. So recently, there has been more stimulation coming from the government. They've reduced rates slightly and are stimulating demand, consumer demand, recognizing that we need to help to stimulate the economy. So those -- we've seen that time and again that those types of policies come out, and it takes some time to work through, but we're long on China, so we see that they have the ability to actually help to stimulate demand in the economy. And so with our long term and our pipeline in China, we do believe that's going to come back.

How do you reconcile, I guess, the health of the development pipeline there in China? Because it seems like signings are still pretty robust, buildings -- hotels are getting built. How do we reconcile that with kind of the nuances in terms of the RevPAR environment? I mean it seems like kind of a tale of 2 cities, so to speak there.

Well, part of that goes to what I just referred to is part of the government stimulating demand and consumer demand and making sure that state-owned enterprises are well funded and are building the infrastructure that they have planned. So some of our -- a lot of our current distribution is in Tier 1 cities. We also are growing in Tier 2 and Tier 3. So a lot of the pipeline, too, is in those locations. And frankly, what's happening with the residential asset class is beneficial to other asset classes because you've got labor that is more available, materials that are more available for other asset classes to build and grow relative to what's happening in the residential market, which has taken a little bit of a change in moderating growth.

Yes. And I think, too, when you think about China on a longer-term horizon, it's still very undersupplied relative -- from a hotel standpoint, on a per capita basis relative to changes in income demographics. There's a desire for higher end, especially internationally branded opportunities. So while there has been some -- there have been some macro challenges that the country has been facing, I think if you're looking out as a developer at the opportunity from a supply and demand imbalance, there's a real opportunity there from a long-term standpoint. So that's why when we sort of think about China, there's obviously the here and now and some of the challenges that are taking place. But from a long-term standpoint, it's a market where we have a desire to grow and continue to expand our operations. And I sort of liken it to if the United States goes through a recession at some point, people don't stop developing hotels. In some instances, it's a great opportunity to take advantage of some of the macro dynamic factors that are taking place. So I think we feel really good about China long term, and it was one of our largest contributors to our pipeline signings in the second quarter, and we expect it will continue to be very important for us.

And just another tailwind there is, we are still -- flight capacity, we talk about this actually every quarter that flight capacity has been building, but that international traveler when you think about the health of the industry in China, it's a significant contributor to the revenue base, and we're still down. Flight capacity is still down double digits, 20% to 30%. So that building back is a real tailwind for us in China.

And can you just remind us what percentage of your business in China is inbound versus intra-country?

Yes. On a stabilized basis, we're at about -- we're a little over 30% international.

Yes, that's about right. Yes, it matters. But it's getting better. I mean it's -- this has been a slow recovery. Obviously, some of the challenges with restricted airspace over Russia for U.S. carriers is not making flight capacity any easier, but you are starting to see some improvement and some increases in direct flights from the U.S. into major markets like Hong Kong, Shanghai, Beijing, but it's taking time. And the other thing, I'd add, too, is you've probably heard a lot of us, but ourselves as well as other industry teams talk about the outbound travel that's taking place from China. China historically has always been a big exporter of travel. And so that's really not an abnormal sort of dynamic that we're seeing, but you don't have that international inbound traveler offsetting it. So that's where you do see some domestic weakness that we highlighted on our second quarter call and have talked about more recently. But there's nothing that we see that points us to believe that it's anything other than temporary and will eventually -- that imbalance will sort of work itself out.

I just want to circle back on one thing with the U.S. outlook. Fourth quarter obviously, there's an election pretty close it seems. I mean have you seen any changes in the kind of appetite for travel in the second half of November? Like are we going to hit this basically window where it's just nobody wants to be out as there's so many unknowns? Or has the demand for that kind of back end of the quarter, the fourth quarter or late fourth quarter has been pretty stable?

Yes. I think the travel in November, it's really a tale of 2 halves, right? The first half of the month has been weaker than we would have expected. Election week is generally not a great week for travel, people tend to stay home at least the early part of the week. What we have seen more recently, going back to kind of our second quarter call, is that the week after election week is historically a strong association group week for the industry, and we're just not seeing the pickup that we would have expected. I think some of that is probably a reaction to the fact that the race at the beginning of July looked like it was not going to be a contest and maybe now is. I started out as a polysty major, but I gave that up, so I'm not going to -- I won't try to model out what I think is going to happen, but certainly, I do feel like they're -- we are hearing that people are kind of just staying home, wait and see. And then obviously, you get into the second half of the month. It typically tends to be strong over Thanksgiving week from leisure and then you kind of have that last 2- or 3-week period heading into the middle of December, where everybody gets the last conferences and business travel before they kind of shut down for the holidays and flip back to leisure. So I think when you think about Q3, Q4 dynamics, there are 4 weeks in the fourth quarter that are more challenging because you've got the 2 Jewish holidays, Yom Kippur and Rosh Hashanah that fall in the fourth quarter this year. Last year, they fell in the third quarter. And then obviously, you've got the sort of this 2-week period in the beginning of November surrounding the election where it does look like people are not traveling as much. With that being said, business travel is so short term that you may see -- we're probably not even in the window for some markets like New York, Chicago, other kind of major urban cities that the second week may sort itself a little bit better than what we're expecting but nothing structural or anything that really gives us cause for concern more just timing shifts, which -- these are good things, right? We've talked about more recently that we have to -- you just have to start thinking about when holidays fall, big events, things of that nature that we used to talk about all the time pre-pandemic that really didn't matter for 3 years, and now they do matter again as we've reached full recovery and beyond and just start to see growth at more historical levels.

All right. On capital return. You recently completed the sale of Orlando, you reached your $2 billion gross asset sale goal. So congratulations there.

Exceeded our goal, yes.

Just to the point that your exceeding it. And you increased your expectations for capital return this year. So you're giving it back out. Your leverage is still sub 2 turns. I know you expect to continue to be investment grade, and that's meaningful, but it is -- should investors expect this $1.2 billion, $1.3 billion type of annual capital return. Is that sustainable going forward or is 2024 just kind of an outsized year because you had that benefit?

2024 is definitely benefiting from the proceeds that we have realized this year and just maybe to put a summary around the capital allocation strategy since we embarked upon the disposition program, we have announced commitments to sell down towards our goal to be an asset-light company, which we've now reached. We are an asset-light company with over 80% of our earnings being in asset-light businesses. We have sold, over the course of 6 years, $5.6 billion -- realized proceeds of $5.6 billion from our asset sales at a 15x multiple. We've reinvested $3.4 billion into asset-light companies at a 9.5x multiple. So when you just think about the value creation from those 2 elements of our capital allocation strategy, significant shareholder value. And along the way, we have returned -- bought back shares totaling $4.5 billion and maintained investment-grade status. So that is an accomplishment we are very proud of. We said we would execute on each of these dispositions in a time line that -- and at a valuation that we felt like we could successfully execute on and we have. So we said what we were going to do and we've done it, and we will continue on that path of balancing our capital allocation strategy between a portfolio of assets that, although we're not putting in place a target as far as what we expect to realize, we actually have some assets that are under contract, under redevelopment, a couple that we've disclosed previously, are just taking some time because they're joint ventures and not our joint ventures, but the venture itself is redeveloping those projects when those close in the next couple of years, we'll have proceeds from those. Investing in inorganic opportunities is something we've done really well and driven a lot of shareholder value. So we want to grow the company. And we will continue to do that and return to shareholders. So I think that's the balance, the amount from which we go forward with on an outlook perspective, we'll keep you posted on. But yes, that is -- when we look at shareholder value creation, I think all of those elements have to be balanced well on behalf of our shareholders.

I mean it's been, call it, 1.5 years since your Investor Day. I mean since then, you've executed on a lot of your goals. But I mean, what are the kind of, I don't know, changes or tweaks as you look out today versus 1.5 years ago to the long-term thesis or kind of the puts and takes to achieving some of those? Where do you feel an increased level of confidence, notwithstanding obviously the asset sale program, which we tick the box on. But where do you feel better about? What are the kind of areas of those long-term targets that you feel like there's still more wood to chop?

Sure. Well, I'll comment on maybe some of the structural items, and then I'll ask Adam to just also comment on performance. So you mentioned the disposition program. So well in excess of what we've modeled and presented at Investor Day. We had every confidence that we were going to achieve the $2 billion that we announced in 2021 by the end of this year, and we've exceeded that, which has an impact on earnings that replacing those earnings is what we have to do over time and what we intend to do into asset-light businesses and with our growth strategy. We also undertook a transaction with UVC, the Unlimited Vacation Club, which changed a bit the economics, our adjusted EBITDA definition. And so that is a simpler model for us, recognizing fees now from our management of the club, which is exclusive to our all-inclusive platform in the Americas. So a great deal all around for us. So that was post Investor Day. And I would say, so those are really, I think, important structural elements for investors to keep in mind because this is the trajectory that we're on now is realizing the benefits of the asset-light model. One thing on the growth front is right now, there's a temporal, slower advancement in the pipeline that we have been seeing. And what happens with interest rates, how does that help to accelerate what our developers are going through, which is evaluating their underwriting and saying, "Look, I've got to come up with more equity right now." And if this situation with interest rates and spreads contracting provide some relief combined, we'll see an acceleration through the pipeline, which is absolutely what we anticipate because if you look at our pipeline, we are industry-leading as a percentage of our existing base. So we have been growing faster, and we expect to continue to grow faster than our peers.

Yes. I think the other thing, too, is if you go back to our Investor Day last year, we've just seen performance sort of pull forward at an accelerated rate. So I think the midpoint of our outlook was, correct me if I'm wrong, 14% for RevPAR for 2023 over 2022, we ended up growing RevPAR at 17%. So part of it was just a faster recovery than what we anticipated. And a lot of that was driven by what happened in China last year, kind of going from 0 to 100 pretty quickly. The other thing, too, that I've kind of talked with investors about is, if you sort of think about the targets that we laid out at Investor Day, we're such a fundamentally different company even sitting here today, as Joan noted, that if you kind of go back and rethink about it through the lens of like free cash flow per share, we're actually tracking very nicely to what we expected. If you look at the midpoint of our outlook for this year and kind of do the math on the shareholder returns, it implies some increase -- a slight increase in free cash flow per share despite the fact that we've sold off a substantial amount of EBITDA this year that we will replace over time. So when you think about the profile of the company being more asset-light, driving more free cash flow as well as the growth opportunities that we have, I wouldn't be so focused on the absolute numbers that we put out at Investor Day, but think about more along the lines of the opportunity to grow kind of those key metrics and what they'll look like this year, next year and then beyond because it really is comparing kind of apples and oranges for many of the things that have changed over -- even this year.

Yes, it's a much different structure like the model is a lot different, that's why I think it's simpler, I can attest to that personally. The credit card, this is not something you talked about as much, but can you maybe give us any details on the upcoming credit card renewal. Is this a material contributor to your overall fees? Kind of what's the growth been like in this segment? Do you see this as a big opportunity to the extent that your renewal, I believe, is kind of on the come within the next 12 to 18 months?

It is. These deals are long deals that we put in place. So it was about 5 years ago when our last deal was struck. And we're a fundamentally different company now than we were then, 50% larger in our room base and our World of Hyatt program has grown threefold -- fourfold since 2017. So we've got a very engaged high-quality World of Hyatt base and a very attractive program for people who want to join or maybe want to join through the card products. So we're looking at this right now and obviously, gives you some more input as we get further down the negotiation path. We do record those fees within our other fees, and it's a significant portion of that mix. As we think about other opportunities for us, too, we have a large and growing international portfolio, so card products even outside the U.S. because we basically have 2 cards now: we have our consumer card and a business card. So beyond that portfolio, we are looking at other opportunities to grow that as well.

And then roughly percentage of your overall fees, is there any -- I mean kind of ballpark in terms of...

We haven't given it out. I'm sure -- I think we'll provide some clarity or color as we get towards the end of the year to help. I mean it's not insignificant. But obviously, when you think about our other fees, you've also got UVC fees in there, which is an important part of that mix as well.

Got it. We have about 5 minutes left. So if you want to make sure I open it up to the crowd. Anybody has a question?

On the group side in the U.S. [indiscernible] big portions of the U.S., I mean that's the [indiscernible] Have you guys changed your thought process or strategy like how you're going to price that group business going forward? Are you seeing any of those changes in rates of what you have building for that?

I would say that -- so if you just look at where we are this year, like in the near term and our mid-single-digit pace, so what's on the books, the growth rate between that is 60% rate, 40% occupancy growth. You look at next year, 40% rate -- the 7% that I provided earlier, 40% rate, 60% occupancy. When you say change, our revenue management teams are looking at this every day and every time a group opportunity comes in the door to make sure what is the dates that they are -- it's a very sophisticated process, what are the dates that this customer is looking for and making sure that we're protecting those very important dates that might be super popular and high demand that we make sure we're maximizing the rates there. So if this is the revenue management, practice-focused discipline that is -- it does evolve every day to make sure that we're maximizing it because the more we do that, the more we're able to generate flow-through for our owners. So the proportions that I provided give you a sense of just how successful that we are here in the short term where a big proportion of it is coming from the rate dynamic.

Could you maybe discuss the key money, your environment, your usage, how important it is right now to kind of getting deals over the line? Are there deals you're passing on because of the requirements or it's too competitive there? Or what's kind of the lay of the land as far as it relates to competition?

Yes. The way we looked at key money is it is a tool that is used in negotiation for management contracts that typically are in unique locations, strategic assets and it's been a long-term tool for the industry, us and others. Presently, the conversion landscape is quite active and so very competitive. A lot of these strategic markets or assets are being negotiated with multiple brands. So I think that's the dynamic that we're facing today. And part of that is the actual interest in converting to brand companies. So this is independent hotels that are recognizing, whether they've been through COVID, whether they're looking at their debt service requirements and they're saying, they had never actually wanted to join a brand because they wanted to retain an identity, and they now are seeing the value of scale and what it can bring to the cost base of their property. And so I would say that we believe we are differentiated when it comes to being able to compete for those deals because a lot of those are independent hotels, lifestyle, resorts, that are looking for a very high-quality customer base, which we have. So I want to tap into the Hyatt's World of Hyatt membership program because I have that kind of particular asset where I think I can bring that guest into my hotel in bigger quantities that are going to be attracted to my hotel and Hyatt will provide me the benefits of scale. So we compete very well in those opportunities. And it's certainly true that the environment has been elevated with respect to competition for those types, which does require key money. To answer your question, Dan, we have turned away deals because we underwrite every single deal with capital, and it's got to be accretive for us in order for us to agree to negotiate and execute that deal.

Okay. I think we're out of time. This was great. Thank you so much, Joan. Thank you so much, Adam.

Thank you. Thank you.

Thank you.