Wyndham Hotels & Resorts, Inc. (WH) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to our next session, which is going to be with Wyndham Hotels & Resorts. Today, we will have Geoff Ballotti, Chief Executive Officer; and Michele Allen, Chief Financial Officer. I believe Matt Capuzzi is also on the line, although I can no longer see him on the screen, but welcome. Thank you for joining us all today. We're excited to have you. Obviously, it's been a heck of a year for the entire industry. But I would say that one of the pieces of feedback that we heard pre pandemic about Wyndham specifically was there wasn't really battle tested necessarily as a stand-alone company, but now you've led peers in terms of the resilience of the model and as we look at the depths of the recession and even the pace of recovery, despite this, I know it's been challenging for you also.

So maybe to kick it off, I'd love to just hear some of the learnings that you've had over this past year during this challenging environment and how that now fits into how you think about positioning Wyndham Hotels for the future?

Well, thanks, Stephen, for having us. It has been just an unbelievable ride. You were just reminding us that we were the -- you were the last team that had us out right before we shut down. We saw it was coming to us from China, where we have 1,500 hotels, and it's been incredible. I guess, the learnings have been, boy, just so meaningful in so many different ways. I think all we have to do is look to just what happened last week in terms of the drive to Memorial Day traffic. I think it says it all. And that's really what kept our hotels doing so well throughout the pandemic, nearly 90% of our franchisees were able to remain open throughout the pandemic, servicing those essential frontline workers that never stopped traveling. And while 37 million people travel, they say, Memorial Day weekend, 34 million of those traveled by car. And they're traveling over 50 miles, and the demand has just continued to build throughout -- since the depth of this pandemic, and we saw -- and continuing to see demand that's just beyond impressive in terms of what we're seeing today.

That's great. I mean, I guess when you think about some of those learnings, if we turn to the hotel operations side, how has labor, and as we think about marketing, breakfast, how is that changing? Do you think that we'll see structural changes in how the operations of the hotel are run? Or do you think that we'll largely skew back to the way things look pre pandemic?

No, I do think we'll see a lot of structural changes. And I mean our teams have been working throughout this pandemic on delivering technology to our franchisees that are what guests are looking for and demanding in terms of contactless check-in in terms of what franchisees are looking for, in terms of technology that will help bring down their labor costs, whether it's what we've been doing on the app side, on the sales force side, on the direct billing side, in terms of taking work off of their plate. I think some of the standards that are changing and rapidly changing are structural in nature. We were the first company that said in the economy space and our large economy brands stays in at Super 8. That franchisees would no longer be required per their brand standard to serve a hot breakfast. And our franchisees have embraced that because it is obviously a big relief to their cost structure. It has been one of the most dissatisfying in terms of all of the survey research that we do for all of our guests, amenities that we provided. And we're focusing on what's most important, which is that clean, well-maintained guestroom, that great night sleep. But certainly, there'll be structural changes at a time when labor is an issue and rising. Luckily, in our world, in the Select service space, labor is obviously on everybody's mind. But it is much less of an issue in the Select service space. I think Smith Travel is out with some stats that 1% increase in labor is 20 basis points to a Select service hotel in the United States where it's 40 basis points to a full serve. And the Select service operation is running at 30 FTEs versus 130 for a full service. But our focus is on doing everything we possibly can to help our small business owners and our franchisees from a labor standpoint, reduce their costs at a time when we all know our labor costs are rising.

And I guess maybe a piggyback on that. What is the #1 piece of feedback that you're hearing from owners then as they're looking to reaccelerate out of the pandemic and take advantage of what looks like a full recovery ahead?

Well, it's, what more can we be doing to drive our average daily rates. And I think having just come off the best Memorial Day that they've ever seen, domestically our Friday, Saturday, Sunday Night, was better in 2021 than it was in 2019. Economy average daily rate is back. Economy daily -- average daily rate continues to strengthen. And pricing power is out there. So everything we can provide them with from a technology standpoint, from a revenue management standpoint, from a training standpoint, is what our teams are most focused on right now.

And then maybe changing gears for -- this might be a question for Michele. Just on the capital structure, does the experience over the past year, change how you think about the right leverage levels and/or liquidity moving forward?

I would say, Stephen, as good stewards, we asked ourselves that question quite a few times. And the answer, after thorough analysis was always no. We came into the pandemic with a target leverage range of 3 to 4x and a liquidity of about $750 million. And we continue to believe that that's the right balance for our business. That leverage range affords us tremendous optionality, and it provides us with plentiful liquidity and access to affordable debt. So I think at this balance, we're optimizing cash flow and shareholder return at the same time. We're not opposed to pushing the leverage for M&A, so long as we can get back within our range, within a reasonable time frame.

Now as we pivot from looking back at what we've learned the forward trajectory here, can you just remind us -- I mean, you referenced getting back to effectively peak levels of ADR over Memorial Day weekend within economy, how do you think about the sustainability of recent strength in that segment? And then maybe looking more broadly, what are your latest expectations or have your expectations changed across different geographies and different subsegments of your portfolio?

Well, mid-scale and upscale and upper upscale, certainly as a way to go to get back to the average daily rates of 2019. I mean we're talking economy. But we are seeing strength. We're seeing strength especially on the weekday in both economy and mid scale. And so much of that week is that blue-collar business travel that is -- we're already seeing in certain segments back to 2019 levels. And internationally, we're almost there in China. All we've got to do is look at May 29, STR data, and we see that at down less than 5% to 2019 levels. And what has to happen to get back to 2019 levels is it those 2 pieces that are lacking that international inbound and that group and meeting business that might not be occurring at the 2019 levels. I think the one thing China has taught us and the rest of Asia Pacific has taught us is that once those travel restrictions are lifted and people start traveling in, I think we're going to see that in Europe soon. Things come back and they come back quickly as they have here in the United States with our economy, both leisure and weekday business demand.

And perhaps tying that demand back to EBITDA, Michele or Geoff, can you remind us of the relationship between RevPAR and EBITDA? And maybe specifically talk to how that might -- that relationship might be similar or different, depending on the recovery across different parts of the business. So economy roars back and is above, but upper upscale, maybe is a little bit lower, does that change that dynamic?

Sure. Yes. So for right now, where we are assuming that economy is roaring back and mid-scale is a fast follower. Then China has kind of continues on its trajectory. And then the rest of the world is lagging, I would say, and then the upscale segments are lagging, so a continuation of the trends that we're currently seeing, are -- the relationship between RevPAR and EBITDA is about $2.8 million of EBITDA per point of RevPAR. And that should hold pretty much for the levels of RevPAR increases that we're seeing right now. There are 4 large items that really are not tracking in line with RevPAR trends right now. And the first and largest is the license fees that we generate from T&L, the former Wyndham Destinations business. This is currently assumed in our 2021 forecast to be $65 million, which is the contractual minimum amount, and that's $43 million below the 2019 levels. So for it to be back at its full value, we want to see it increase another $43 million. And for it to do that, we would need to see the gross VOI at T&L be above $1.6 billion. We don't really see that as a credible scenario in 2021, just given the start of the T&L business. Now T&L hasn't given full year guidance. So we don't want -- we're not going to obviously give guidance in place at them. But if it is a little bit above the $1.6 billion, it would not be meaningful incremental to our 2021 scenario. We're getting about 4.1% of every dollar above the $1.6 billion. So you'd have to see at about $1.2 billion above that amount to get back to that $43 million. So -- but we do see the meaningful upside in 2022. And then the second large item is our 2 owned hotels, one in Puerto Rico and one in Orlando. And those hotels will follow more of a recovery and trend that looks like upscale hotels. And these hotels have a little bit more group and corporate business customer than our traditional portfolio does. Q1 is their strongest season. And so demand was really low in Q1 2021. And so there -- I think it's about a $15 million drag between '21 and 2019. And so that's something that we expect will not recover fully in 2021. But we would expect to see it recover much more meaningfully in 2022. We had some ancillary revenue streams and some temporary bad debt increases, but we would expect those to kind of smooth out over 2022.

And Stephen, you mentioned the pricing differentials between the segments. I mean one of the things, Michele and I were talking about this morning with some of your investors that we were thrilled to see, I mean, there still is a gap. Upper upscale occupancy was down, Friday, Saturday nights Memorial Day weekend by, I think, double-digit, by about 14%, 15%. But upper upscale ADR increased 8%. And luxury ADR increased a staggering 25% to 2019 for those 2 same nights, Friday and Saturday night versus Memorial Day of back in 2019. And combined, they drove positive RevPARs for the upper upscale and luxury. But that pricing gap is important for our segments. The upper upscale is still at a $50-plus gap to upper mid-scale and upper mid scale, I believe, is at about a $40 gap to the economy segment for the month of May. So our franchisees, our small business owners' ability to drive rate the way they're driving it. Because of those gaps being there because of the demand on both weekends and weekdays is really, really important. I mean this compression that so many people feared with economy and mid-scale travelers trading up to falling upscale and luxury rates. Just the fear of force discounting in the economy and mid-scale space just hasn't happened. I don't think it's going to happen. There's great pricing power out there. And franchisees realize more than ever. And we've talked about this a lot with the investors, the importance of driving rate over a point of occupancy. And there's no better place to look right now than our mid-week pricing power for our segments in Smith Travel research results.

So I've got a few follow-ups there for you, Geoff. But the first is, as you've had this strength in leisure travel, normally, what we would -- I think what people will think about is the playbook coming out of a recession would be that you'd have leisure driven by OTAs, more distribution coming through the OTAs. But it sounds like the leisure is so strong. Are you actually having to rely on the OTAs? Are you seeing the OTA mix sustain? Or are you seeing more direct bookings? And then how does that play into the value proposition of Wyndham when you're going out to talk to independents and thinking through conversion potential?

Yes. A lot of questions in there. We saw throughout 2020, and we talked about this on each of our calls people knew where they wanted to go, people were booking direct. And our direct contribution, as we talked about on the first quarter call, was up not only to 2020, it was up to 2019 by 300 basis points. And the biggest driver of that was through our Wyndham Rewards loyalty program, over 80 million members -- over 85 million members today. We added 1.2 million members in the quarter. It keeps growing. Our Wyndham Rewards influenced revenue, meaning the percentage of revenue that our franchisees globally received through Wyndham Rewards increased by 800 basis points from 2019 levels from 35% to 43% in the first quarter of 2019. Our overall share of occupancy here in the United States, on any given night, is well over 40%. Some brands significantly higher than that in the 50s. But these are members that are staying longer and spending more. They're really important. And obviously, with direct business up, OTA share has not been growing. People know where they want to go. I think there's a lot more transparency out there. Folks are educated, but they're doing their homework. They realize that with all of the flexibility that this industry has given them in terms of cancellation policies. There's -- you're in much better shape booking direct. So I think that is going to continue. And our franchisees are embracing the program. And we're signing up more members every day, every week, every month, every quarter.

Now bringing it back to your P&L, you had talked about some cost outs, permanent cost-outs previously. Maybe if you can just update us on where you think margins should ultimately shake out as we think about these different recovery scenarios and where are these big buckets of maybe sustainable cost-outs for your business, but you could also talk to or loop in what you're seeing from a franchisee standpoint.

Sure. Well, for our business, I'll touch upon that first because it's quite simple. We had -- back in April of last year, we'd identified $40 million of permanent cost reductions as a result to the restructuring initiatives we implemented in connection with our COVID mitigation plan. And we still remain confident in that number, it's about 300 basis point improvement in the margin, compared to 2019 results. From an owner's perspective, Geoff did mention the rising labor cost. And our job as a franchisor is to help them offset as much as that increase as we can. So he mentioned the change in breakfast standards and so that applies obviously the reduced requirements applies to economy hotels, but we've also made changes on the mid-scale and above to help reduce the cost of breakfast and he made a lot of changes to our source programs to drive incremental efficiencies on the food and beverage side. There are a number of other programs, for instance, we're rolling out a bunch of different digital tools to reduce front labor cost, the overall check in time, which will then drive down the overall cost upfront as labor. So those are just a couple of examples to help mitigate the margin impact of rising labor cost.

Great. And one of the other things that, I guess, we hear pushback from investors on beyond just the being battle tested is on net room growth. Perhaps you can walk us through the puts and takes that have impacted room growth, net room growth pre pandemic, how that's maybe evolved through the pandemic now and where you see gross additions, attrition and conversions trending currently?

Yes. We were really pleased with how things trended both sequentially Q3 to Q4 and then Q4 to Q1. We opened 23% more rooms than we did prior year in Q1 domestically and 24% more rooms internationally. So we were pleased with the progress. They're in line with our expectations. And while they're above last year, and we knew it would be slightly below 2019 levels, but we're on track to where we've guided to. And where have we guided to? We've guided to a 1% to 2% net room growth in 2021. And we are looking to capture, in terms of puts and takes, about 80% of what we opened in 2019. Now in 2019, we opened 65,000 rooms, Stephen. 80% of that would be about 50,000 rooms. We opened 15% of those 50,000 rooms in the first quarter, which was 5 points more than we did in the first quarter of 2019 when we grew rooms 3%. We know openings are back half loaded. We had a really strong first quarter of execution. We executed 13,000 rooms in the first quarter. We're really pleased with our teams. That was over 90% of what we did in the first quarter of 2019. And so, look, where are the -- where are those room additions coming from. They're coming from the conversion opportunity that's out there. We opened gross room additions, 90% of our room openings in the first quarter domestically were conversions, and that was up from Q4, and it was up internationally as well from 30% of our openings in Q4 to 50% of our openings in Q1 of 2021. So that, combined with our look to return to a 95% normalized retention rate, which, excluding our onetime strategic turns over the last 12 months we ran and when we look at the progress our team has made in the first quarter with terminations down 30% to prior year and down 35% to Q1 of '19. Moving that retention rate from 95% to 96% gives us a feeling that we're going to be able to move that 2% to 4% algorithm that we've always had out there to 3% to 5% over time. And we certainly have a great history of moving our large brands, our days ins and our Super 8 brands to industry-leading retention rates of 95%, 96%.

That's super helpful. One other follow-up is, as we look at that pipeline line and we look at the conversion activity that's been happening, how does the -- that convert to fee contribution, meaning does 1% to 2% convert to 1% to 2% fee growth? Or based on the geographies or chain scales, do you end up higher or lower in terms of where that would be, where that contribution could end up?

Yes. I think most of our growth, as we've talked about, is going to be coming from international direct franchising, which obviously has a lower royalty rate, but we do expect the U.S. growth to begin to contribute to net room growth in the back half of 2021. And our pipelines are strong. We're not doing -- we're not buying any more master license agreements, we're trying to buy them back where it makes strategic sense. We're doing a lot more direct franchising. And so I think it should be pretty consistent from a royalty standpoint to what we've seen before in the past with an opportunity to grow that royalty rate internationally over time as we do less master license agreements and more direct franchising.

Domestically as well, for opening through the mid-scale category and less through the economy category. It's just where our openings are coming in today.

And on that royalty front, is there an opportunity to grow the royalty fees within the direct line? And does that typically occur on a contractual basis? Or how would that usually manifest itself?

Internationally, it does occur on a contractual basis. So a lot of the contracts will step-up in fees. In the U.S., where the brands have already a very, very solid level of brand awareness, they're predominantly at full fees or already written at whatever the lifetime contractual fee would be. So no, there's not a significant amount of step-up in those fees. And so where I would expect the incremental growth in the royalty fee to come on the international side would be just from kind of re-weighting the portfolio more toward that mid-scale product and less toward that economy product, as opposed to international will be driving more toward the higher royalty deals.

And certainly, Stephen, as our brands become more known and more aware. I mean our brands are searched 6 million -- 6 billion times, globally online as By Wyndham. And that By Wyndham affiliation is really important for our teams and as we're doing more direct franchising than we're doing master license franchising, our team's ability as we enter -- there are so many markets where our 21 brands do not exist. We opened -- we introduced 5 brands to new markets in 2020, and we might, to Michele's point, contractually agree to a lower fee as a brand that's not known, like, La Quinta, behind me, goes into a market like Turkey. There's one in Istanbul at perhaps a lower fee than the next 2 or 3 in that country that opened. And so much of that is contractual, but our team's ability is with now 100 hotels or thereabouts in Turkey to ask for more royalty with each deal added on a direct franchisee basis becomes stronger.

That's helpful. And you also -- I think it was a quarter or 2 ago announced some plans to start increasing key money to spur some of the development. Maybe, if you can talk to the impetus for that decision and how that impacts the visibility of that net room growth, not only this year, but maybe looking further out. And how is your -- how have those conversations tracked versus your expectations of deploying that capital?

Sure. I wouldn't say that there was a game-changing moment that drove this increased allocation. We're constantly looking at capital allocation to determine what is going to provide the best return for our shareholders. We've had some success and -- when we use development advance products in the past, and we wanted to build on that success, particularly because our first priority is investing in the business for future growth. And so pre pandemic, there was some talk and concern around around did we reach the top of the cycle, were we heading into the down cycle where there are concerns around potential availability of financing. So we wanted to create a tool of vehicle, that would provide some alternative financing, should we find ourselves in that scenario. And so that's kind of what that gave rise to this incremental allocation to development advances. And so today's money is really being allocated toward new construction products -- projects, but also now conversion deals, because that's what -- that's the market that we're in. And so the conversion deals that we're focused on are really high-quality assets in high-traffic destination type markets where we kind of get that billboard effect for the Wyndham brand name. And then any deal that we do from a key money perspective is going to have a strong cash-on-cash return, not just for us, but for the hotel owner. The question you asked about how are our conversations going. We're having a lot of interest. It did take some time to train the development team because we had to kind of like untrain them from not using the balance sheet. So it did take a little bit of time to say, okay, yes, this is a tool that is now available to you. And let me help you understand how to use it responsibly so that you can -- so when you talk to hotel developers you can be educated and smart about how you're using these tools and what it means. And so we developed a lot of different pieces of technology they can use in a in the field to help them through it as well. And so there's been a lot of interest and the teams have underwritten a lot of different deals. And we've had some learnings along the way. We've had to tweak the model a couple of times, but we have a lot of great projects in the pipeline. And some have -- I'm not going to comment on specific deals, but some have already opened. So we've had -- we're building upon that success, and we're really excited to kind of see what continues to come our way, particularly in this environment when you have great assets, hopefully coming to market.

There's not a franchise sales or development professional, Stephen, around the world, that's not on a first name basis with Michele Allen. I used to joke, it was an eye dropper where she would bill it out. But she's been engaged beyond words.

Now when they call me I know exactly why.

Well, before we wrap up, I think one last question. Just given that you have, you're seeing RevPAR recover, you're seeing EBITDA move back in the right direction, you talked about the leverage profile in your opening remarks. Now maybe tie that all back to capital allocation, how you're prioritizing, not just key money, but now thinking through redistributing cash back to shareholders what the priorities are there? Does M&A, too, a factor into that at all? Are there opportunities that we should be thinking about?

M&A does factor into it. I think our first priority is always going to be investing in the business. So whatever the business needs to grow, especially getting our net room growth up to 3% to 5%, which is our longer-term goal. We're going to be investing in that growth. And so this key money allocation was part of that. We don't think we're going to have to spend any money to get it back within our target leverage range of 3 to 4x. We think we're going to get there predominantly through actually really all through EBITDA generation over the next 6 to 12 months. So that's not going to be a capital allocation piece. But we do want to get the dividend back up to 2019 levels. That's a top priority for us. Right now, we're about 50%. And we typically target a low- to mid-30 payout to net income ratio. So I think there's some room to run there before we would commence a share repurchase program. And so then anything that's left over is going to be between M&A and share repurchase, and it's really going to depend on whether or not there's a compelling opportunity that emerges. And if there is, that's going to be our preference. And if there isn't, then it's going to share repurchase. It's pretty much that.

Awesome. Well, that's helpful. We are about a minute or 2 over. But thank you so much for joining us. Good to see you all virtually. Hopefully, it will be in-person soon. Thanks, everyone else on the line for joining us as well. Next up, we will have DraftKings at 2:25.

Thank you, Stephen.

Thanks, Stephen.

Thanks, Geoff. Thanks, Michele. Thanks, Matt. Take care.

See you, Stephen.

See you.