Hyatt Hotels Corporation ($H)

the last 5 years in the industry, that route growth over the last 9 years in the industry. And so that's really the core what the strategy piece of the discussion was about. But that's not all because we had a bunch of financial really compelling financial results of that with generator .

Sure. So 1 of the major highlights part of my presentation last week was to really illustrate these metrics around -- because what tends to get lost, we think, in some of the coverage is the fact that our organic growth rates have been exceptionally strong and industry-leading. So Mark mentioned our net rooms growth for the past 9 years. Since 2017, we've grown on a compounded basis by 9%. Organic has been 7%. So that has led the industry. That is the number of the organic growth rate. That's what -- and then fee growth has grown since 2022 at 14% on a Organic is 10%. That leads the industry. . So I think there's some debate around what is actually behind those numbers and how do we break it out? We did the math, and it's really, really compelling because everything Mark is talking about with respect to differentiation our competitive advantages has translated into results. And when we are expressing all of the elements of our strategy to maintain those competitive advantages, it's going to be durable growth well into

I was just going to say the 1 other thing, I think that's changed a lot is conversion of earnings to cash flow. So maybe...

As 3 years, we've been averaging 55% free cash flow to adjusted EBITDA. And very much our expectation over the next 3 years, which is the outlook that we provided at Investor Day that we will have that same and even growing because we just see great opportunities. So what we said is that mid-50s number, which is very compelling, especially when you look at the industry -- and our asset-light mix is here. .

So I think that in 2022, going back a little bit, the investor actually pointed this out at your Analyst Day, they said that we had talked about how you had the ability between asset sales and free cash flow to give back effectively 50% of your market cap. Now when we look at the numbers you've laid out, still over 30%. So you had a little bit of a multiple change, but still over 30% of your market cap is available in terms of the free cash flow and some of the asset monetization. Is some of the change in message -- or I shouldn't say change investing, some of the messaging meant to be, we're now at a point where we're going to be more focused on organic, more of that cash is going to go back to shareholders. And the capital allocation priorities are shifting a little bit? Or is it kind of same trajectory or same prioritization from a capital allocation standpoint that we had in the past.

Well, I'll let Mark comment on opportunities potentially that we see relative to inorganic growth. But we've been very successful in investing in asset-light businesses. Our track record here has been a [indiscernible] on a stable basis, realizing below a 10x multiple, about a 9x multiple. And a lot of that has come from the realization of proceeds from asset sales that we've reinvested, and we've also initiated amount to shareholders along the way. So when you look at the balance of what we've accomplished and the shareholder value that we've delivered by making those investments and also returning, that balances what we anticipate into the future. We haven't given specific guidelines beyond that, but we definitely know that we'll be able to balance them given the average.

And we will continue to look at inorganic opportunities. I don't know that any of them will be massive in size. I think the really compelling dimensions of target potential targets would be a coincident or adjacent customer base to our own. And secondly, a geography or a subsegment that we think is particularly attractive, and we think we can actually address faster and better by buying something than building it. We've launched new brands in the upper mid-scale islets and also unscripted by Hyatt. And we think that, that's the best way for us to grow in that segment as opposed to through acquisition. But there were probably other pockets. And that's the way I think about it. There are probably other niches and pockets different places where we might find opportunities. But we would still run the playbook that we have in the past, which has really looked to deliver sub-double-digit multiple effective multiple acquisitions.

On the -- John, you made the comment that sometimes recycle the capital that you sell you view the asset monetization proceeds in a different lens than free cash flow generated from the core business? Or is it all together?

It's really altogether. I did also state last going back to the Investor Day message is that we expect to be about 95% asset like because of the opportunities we see on selling some of the real estate portfolio today. And so that -- it all depends on timing. Timing of the opportunities that Mark is describing. We'll have greater opportunities from a leverage ratio perspective to take on some debt to for opportunities or for return to shareholders. So as you think about balancing all of that together, we've got a lot of options going forward. And we look at excess cash where there isn't an opportunity that's going to create great shareholder value and be accretive, turned out. .

So 1 of the other, I think, messages that surprised -- I shouldn't say surprised, but it was definitely above where consensus expectations was, was on the room growth side. So 6% to 8%. Secondly, best-in-class, highest of the peer group. Maybe talk to us about what gives you the confidence in sustaining those. Where is that growth coming from across different categories? And I think we often look at the pipeline, but I know the pipeline is not the only thing that ends up leading to room growth. So maybe you can tie in conversion activity within that.

Sure. I mean I think the pipeline, you got to start there because it's -- we have the highest pipeline ever and the pipeline activity and the new dialogue that we're in on a bunch of hotel development opportunities and including this week, like I've been taking pulse indicators from our developers that are here for the NYU conference and the activity level has been super high. So a lot of interest in the brands, especially the newest brands. And so I think between the huge activity, the surge in activity for Height Select and unscripted and high studios, which is really exponential in dimension. In addition to a strong pipeline and a lot of that pipeline is outside the U.S. and it's full visor luxury hotels. We think we're going to end up both growing the premium segment and serving getting into -- getting representation into a lot of new markets through the upper mid-scale brands that we haven't and that we launched. The 1 other thing that I would say is it's not just about -- I made a comment that caught some attention, I said, when you're eating salary that we referred to as empty calories. So NRG reported by itself is not that helpful. I don't think if you're an investor, you want to know how much money associated with your growth. And so what I said is we're not interested in talent nutrition, which means money, and the money equation is that the stabilized fees per key in our pipeline is higher stabilized than the current piece per key that we have in our system. So -- and that goes to the mix. So we've got a significant number of full-service and luxury hotels, resorts in the pipeline, and that's helping to sustain a very high per key for the new hotels that are coming. So I would just take close attention. A lot of the conversion activity is going to be in the upper midscale. And I would just say -- I think that's distinct and different to some other systems that are also seeing a surge in conversions in the lower mid-scale and economy segments because of their new brands. So you could have high conversion rates, we do expect to have high conversion rates, 35%, 40%, which is really what we've been running at. I think we will still see that. But ours are not per mid-scale or above. And I would say a lot of conversion activity that we're seeing elsewhere in the industry is lower mid-scale and maybe even economy. Would you ever want to go down into that category

It will take a while. I mean -- we want to fill out the upper midscale because we have so much room so much empty space there, white space markets in which we don't have our presentation. So it will take a while for us to want to go down. We have -- we're strong believers in continuity or adjacency with respect to how we grow the segments that we're in, we've looked at and rejected opportunities to buy brands that were mid-scale or below because there would have been a gap between upscale pro place House and those brands. So we looked at a bunch, but we kept on projecting them because we don't believe that establishing essentially a bimodal distribution of members is helpful. It doesn't create a network effect. So people who -- and we used to own Microtel, we used to own best in, we used to own all turn suites, but there was the big gap between iPlace and those brands never between did they meet. There was no crossover. We don't want to have huge system down here and a system down here and A-System up here with any 1 or a gap, we believe that the continued -- continuity is really the best way to do it because 80% of the cross-brand case that people have are 1 sway. That's really -- so we need to maintain -- we believe that we want to maintain annuity adjacency all the way through. So if we do grow, it will lead to mid-scale and the lower mid-scale vendor economy, but that's going to take a decade -- and so that -- just to be clear on that, so effectively, it's maximizing the value of your loyalty program because people are going to be earning and then redeeming and staying in the system within that short Exactly. Narrow band, I should say. That's it. Great. You also renegotiated your co-brand credit card program late last year, you said you were expecting a doubling of the contribution to, let's say, roughly $100 million in 2027. Remind us how these programs work. What are some of the drivers as people start to see some of these creep up in terms of the contribution? And what's included in the multiyear outlook that you talked to?

Is the -- what you were referring to is the doubling it from '25 to '27 put out there for 2027. And we expressed that we thought that was reasonable and time because what we see is very strong engaging and spend on our card. And what our being partners is telling us is that it's even stronger relative to others -- to other cards in the industry. So it's a very good partnership that we have. chase, and it also is an opportunity for us to expand that partnership into the future. So when you think about future, the future of our card portfolio, we think there's opportunities. This is something that our Chief Commercial Officer talked about as well that we think expanding into areas outside of the U.S., maybe a premium card as well in the U.S. These are all things that we're exploring, and there's real opportunities for us in the company -- and that spend that we're seeing from cardholders is what we are collecting a license fee on. So high benefits, the program benefits our owners benefit because we increased the base, increase the network in actually the World of Hyatt membership based. And that increases the benefits that are delivered to owners because those are that are spending more, staying longer, going to hotels first when they open. So it's a win-win for -- across the stakeholder group.

I feel that I still have conversations with folks who confused by the programs a little bit and the drivers. I think some of that stems from airlines have similar programs, but they don't have a franchise system to also think about. So I guess when helped clarify that, perhaps, just, one, the programs are based -- maybe if you can clarify purely based on top line spend and the number of sign-ups on the card. There's no profitability component? And then two, you kind of alluded to this, but is there flexibility in how you allocate the total remuneration between the consumer's point that they see the value of the card, which we can compare and contrast points across programs and see that value. subsidizing or at least helping drive marketing and/or the loyalty program itself and then that fee that we see to come to you. That kind of set in stone or those split can those be different?

Well, 1 of the benefits that we have in our program is a transparent award chart. So I didn't mention the win-win is also includes our guests. -- because we have -- as we look at the experience that's provided both as being a member and what is received to the benefits that are received on property, we feel great actually about what we're delivering actually through those benefits and the experience, and we see it through the engagement, right? We wouldn't have the engagement numbers that we have without that type of -- so that is -- that chart, we make changes to it periodically, and those are adjustments that are made based on market. And we know that our our actual terms are very, very competitive and still very attractive to a lot of members. So that's where I think there's some flexibility only in that we want to do that, be transparent about it so that our members can plan. And our owners can plan. And as far as the license is concerned and the split -- that's something we evaluate and you do that in a rigorous way with this is counting elevation. So that's done. It's not something that changes make a statement about the license fee you look on top line revenue. .

And I do think it's a -- we are focused on making sure and demonstrating to our owners that this is unambiguously great for them. So we -- this doubling that we talked about has nothing to do, nothing but any changes in the royalty rate effectively that we are charging to the program, nothing -- and so the increases that we're seeing on our side are even more significant for the funds that are flowing into the program, which allow us to spend on promotions, then on marketing spend on advertising for the benefit of our owners. So we feel like that's a really critical dimension. We have another travel program called United unlimited vacation club, and we did extensive exhaustive work to make sure that the owners were benefiting an equal measure to our guests and to Hyatt because at the end of the day, that's the lifeblood for future growth. we didn't -- going and reevaluating something like that is a big deal.

Helpful. Another area of, I think, questions that we get is around the distribution side of the business. You have in the multiyear outlook, low single-digit growth, which is a little bit below the other fee growth and the algorithm, maybe talk to some of the assumptions both near term and long term to consider for this segment?

Yes, I'll start off. I think that was really meant to mimic what I would consider a conservative outlook with respect to growth in total travel volumes from -- he because trouble volumes have come off we are running at a lower rate than 24% to 25%. 25% is lower 26% is now lower. And the reason is twofold. One, we've got well, threefold, I guess. One is Jamaica, the hurricane. The second is the security concerns out of Portovarata in February of this year. And the third is that the 4-star segment of the volume of of travelers that ALG vacation serves has been under a lot more pressure than the 5 star. That still represents a significant portion of the total revenue base -- so those 3 dynamics are what has driven the top line, the total volume at travel down. We look at where we are which is Jamaica being rebuilt. All of our hotels are being rebuilt right now. They will be reopening probably in the first quarter of next year, really fully refurbished. So we'll have the best product Mexico security concerns have debated a lot. And I had a picture from earlier in part of IATA April from for a little bit -- it's all good. I'm making a little pitch here. Here we go. It's awesome. It's a -- and by the way, Americans truly you're in call due diligence folks. I would just say Americans notoriously ignorant of geography, people read about something happening in Portal, and they won't go to Cancun. It's like saying there was a disruption in L.A., so you can't go to New York. Literally, that's not an exaggeration, by the way. Just look at the map. So it's an amazing technological phenomenon that we, at some point, will overcome as a country we see. But -- the -- so 2% to 4% total increase in travel volumes from the low points that we're at now, I consider to be a very conservative for things that are hitting it this year, but underlying maybe -- so I think there's -- I really -- I'll say it again, I think it's a very conservative outlook. And I think we're also working on a number of initiatives that will increase and improve efficiency. There are some additional opportunities the white label space that I think we will be pursuing. So across the board, I think there's -- we've taken a low bar with respect to the performance that we outlined for distribution.

How integrated is that business with World of High and other aspects of the overall portfolio?

It's significantly integrated to the high inclusive collection represent some 16% -- 15%, 16% of the volume of something like that into our resorts in the Americas. So it's a significant channel for us.

Does that come down then as No, actually, in some ways, I think it's gone up I think we're outperforming the market. The hyalinosis are outperforming the market. I think 1 of the drivers of that is our ALG vacations.

Actually more and more volume into our book.

I'd love to comment earlier about ease and money tied to room growth. So the royalty rates are a component of that. But maybe if you can dig into it a little bit double click, as they say, maybe puts and takes to think about both international and domestic as we look at royalty rates, how those are currently structured and how they may change over time.

Well, in the U.S., this has been consistent. -- for the contracts that we enter into in the U.S. that there's typically hurdles, right? So we're earning top line all the top line primarily. There are some incentive fees in the U.S., but it's and 10% of total incentive overall. So most of our incentive fees are outside the U.S., where those contracts are primarily smaller base fees and a larger profit that profit component is typically not after a hurdle earned on their seller. So as we look into the future, 2/3 of our pipeline pipeline, but 2/3 of our pipeline, full-service hotels outside of the U.S. So that's when we make this comment about the strength of the fees per room that are embedded, the stabilizes for limited in our pipeline are very strong and are accretive to our existing base. That is about 1/3 of our pipeline coming from select service hotels. That's sort of how you can think about the future of the incentive fee mix -- excuse me, the total fee mix. When we look at on RevPAR fees, we expect those will be growing at Eldo, that's resi that PVC, the elimination cloud.

Can the resi business being. Is that mainly skewed towards the higher end.

Yes, it is. I have to say is remarkable to see. But I think we did not actually appreciate the impact that having someone full-time dedicated with a great deal of experience and really business at the branded residential. And we have a great leader on board right now. And the volume of activity has skyrocketed. So we are seeing just enormous demand. So with Thompson branding residential program in Mexico, which was -- which will translate into other parts of the world. standard stand-alone residential, we've got an approach with the standard with other stand-alone resi. The Park Hyatt branded residential activity is really expanded significantly. So we're deliberately going after and really pitching in a very affirmative way where branded residential can make the biggest difference. The new Park Hyatt in Mexico City that will open later this year at a significant branded resi component. O2 is the Thompson and reformat Thompson Orthovita we're seeing a significant measure of both lifestyle and luxury properties, branded resi than Cacos, beyond dozens of disties will have a resi program. So this is going to be a growing component piece of our total fee the fees there work where you.

Collect a fee when it's sold and then an ongoing management fee going forward? If we're managing the OA, then we earn a fee on the HOA management, but for sure, the work upfront is -- are you generally managing those? We are. Because I imagine they're also those -- is they're integrated with hotels.

Yes. And even the standard, we are managing the standard HOA, the stand-alone resi because there's no hotel associated with it. But yes, in general, and in the main, we will be managing the HA.

Great. I'm going to get into the other topic to Joan, which is more about demand trends. I guess I'm curious to hear what you're seeing across the environment as we look at different segments of demand kind of split between small, medium-sized business, large corporate, leisure, any other segments you'd like to dive into.

As we sit here today and as compared to what we said on our first call, we feel really good. The better results than we had anticipated or forecasted in April and even into May, which is preliminary at this point. What's notable is that the U.S.. So we feel good about what we've been experiencing. It's still short term. The booking windows are not that long. Leisure is a little bit longer, but the U.S. being as strong as it is, that gives great confidence and into the future -- the group also has picked up looking year in the year for the year. Some of that is going to be coming through the summer months in the World Cup, but it's also going into the latter half of the year. So great numbers coming from the U.S. Outside internationally, still very, very strong in Asia, Europe Middle East has been the 1 area, although we've gotten progressively better in April and now even in May. So -- sorry, in May compared to April positive on the full year. We had given some Q2 sort of indication. We said about 3%. We feel very confident about that number. better midpoint on the fees and EBITDA mid-single digits growth rate. .

I think it's between small and medium-sized businesses and larger businesses, we're seeing really persistent demand from our larger managed accounts global accounts. The small medium-sized businesses also positive, not as much as larger businesses. So the rate renegotiation also yielded single-digit increases for most of our managed accounts or volume account. So we're seeing really pretty positive, both group and transient travel out of our larger customers. When you take a step back and think about those trends, which seem really healthy relative to kind of the line we had been on for a little while last year, certainly, there was a lot of noise deliberation. Otherwise. But I'd say even if we went another year earlier, it would have been similarly kind of choppy.

What gives you -- what would make you get more confident that we're going to sustain these higher demand trends? Or what do you think the underpinnings are.

Well, I think there's a tremendous amount of economic excuse me. Sorry about that. A lot of economic activity that's driving the core demand. But I think -- we're a pretty significant chunk of our business because we're serving a higher income households and because leisure is now more than 50% of our revenue base, that is durable. So we don't have any -- we believe that, that phenomenon is a durable, reliable reality for us, no matter what happens in the rest of the on the upside and the downside is, my opinion, revolving around a major issue, which is a patient which fuel because for lower-income households are Fuel costs have it on their travel budgets out there on their discretionary consumer buying habits. So I would say if we see a more prompt conclusion of the around war and then whatever recovery time and we start in the time it takes to get pull back on refineries back online LNG, back online and on the water again. That will tend to help bring inflation down. And I think that could be another way to sustain demand. longer period. But I generally agree with what you said. It's been happy and not and unremarkable in '24 and '25. I think it feels more solid across the maybe more normal and more to more -- turning to capital allocation. So 1 of the things that you referenced in the outlook was investment grade. Why is that a key focus for the company?

How do you think about the value of that, especially as you move to this more 95% asset light and perhaps the business has greater visibility and flexibility.

Well, when you think about policies generally, right, this is very important to maintain consistent diligence, discipline around your financial policy. Then part of our policy for -- and we have benefited in times of volatility and uncertainty, to be able to maintain our investment grade and rely on that to access capital markets and do it in a very constructive. So we will continue to maintain that -- it's benefit. .

Yes. I mean the equip that I always use was first role, we're in a cyclical business. Second role, don't ever forget the first rule. And so maintaining investment grade is just a way for us to sleep better at that.

Makes sense. A follow-up to that. If you're looking at investing in growth, -- is there a range to think about in terms of leverage that you'd be willing to tolerate or any maybe be able to move outside of for a temporary window of time that might be outside of the typical investment-grade bank SP-6 We already did

At multiple times when we acquired ALG in 2021. We were outside and, so to speak, which is around a 3x gross leverage. So at that time and then would play a too. So we still have -- I mentioned a little bit of deleveraging that we need to do. It's a little bit back but there's a grace period that we have. And frankly, because we've maintained content with our financial policy, these types of grace periods and a commitment that we make means something to agencies and to our investors as they do to see what we're going to do, and we do it.

Mid to 95% asset light, that would generally mean higher free cash flow not. That's outlook. Alterative outlook, 95%. But that would still mean that yes, cyclical business. but less operating leverage than it -- but that wouldn't change how you think about the leverage profile at this point I think we want to maintain an investment grade. -- keeps the flexibility Well, we are -- go ahead. If you've got a different perspective, we're open to your input, right now. Not yet, not yet. Maybe in the future. All right. We'll talk.

Well, please join me in thanking the Hyatt team for all their insights.