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

Good morning, everyone, and thank you all for joining us. I'm David Katz, gaming, lodging, leisure analyst with Jefferies. And we are pleased, enthused and honored to have with us the management team of Wyndham Hotels & Resorts, Geoff Ballotti and Michele Allen, CEO and CFO. We're going to spend the next few minutes, I'm sure that we have more issues to talk about than we probably have time to address, so we are going to get right to it.

Geoff, what I would say is that since the spin in 2018, it's been a pretty active but productive, by most accounts, journey. Integrating La Quinta, removing some unproductive properties, refining the enterprise in Asia. Have I left out any of the most important productive accomplishments? And I suppose it's a fair question to lead off. What are the next most important things you'd like to accomplish going forward?

Sure. Well, thanks for having me, David. Always a pleasure to be with you. I wish we were face-to-face someplace, which we will be soon, I hope. In terms of what you left off, I mean, we could spend half an hour talking about what you've left off in terms of what this team, our great team has achieved since spin. I mean there's just been so many technology sales, marketing operations, development issues. You mentioned La Quinta, our ability to grow La Quinta 8% since we acquired it, maintaining that 98% retention rate and introducing it to so many new markets in Latin America, in Asia Pacific now, in Europe and in the Middle East, is something we're really proud of. Growing our upscale brands, our Wyndham, our Wyndham Grand, our Dolce brands have been growing 25% globally, 50% internationally since spin is something we're really proud of. But I'd say what our teams are most proud of, you've been to, and we've talked about this before, in fact, you talked to all of our team at a town hall once about the importance of franchisee engagement and you've been to our global conferences where we attract 8,000 of our franchisees. And I would say what we did early on in this pandemic and what we've continued to do throughout this pandemic has built franchisee engagement to a level before that we've never, never seen. We believe we were the first in the industry to offer all of our franchisees fee deferrals and waivers for the months of March, April and May, interest-free through September. That's gone a long way. Our teams have continued to look since then for what it is that we could do to continue to provide financial support. Franchisees are -- while occupancy in the economy space and now the mid-scale space we see is back to 2019 levels, they still need -- they still need support on the cost side. What we did with breakfast was just one of many in the economy space. We were the first out there to remove the mandated breakfast standards that had crept into the economy segment that we believe have given them a lot of relief, and we'll keep looking for that. But I would say, going forward, what we're continuing to look to do, to your point, is do what we did leading up to this pandemic for those 5 years up to 2019, continue to grow our rooms at 2% to 4%. Get back to that over 95% retention rate, that has really been remarkable. When you look at Smith Travel's retention rates in the economy segment, we have the best retention rates. Our brands have the best retention rates because of how well they're performing right now. And we were at a 95%, 96% nearly retention rate in 2019. That extra point, we believe, will allow us to move from 2% to 4% to 3% to 5% longer term, which is really important. And then all the things that Michele is working on with her team, I mean she's done a remarkable job with the balance sheet. She was able to achieve a lot. But if we continue building our value proposition, it will mean that we could continue to deliver long-term EPS growth in the low teens, free cash flow conversion from adjusted EBITDA above 50%, net leverage in the 3% to 4% range and a dividend payout in the mid -- low to mid-30s, and that's really our focus right now.

If I can ask one just short follow-up that I think gets Michele involved, when the franchising business is working well, the quarters are predictable and they're quiet, right? There -- and I think earlier on, post-spin, they -- I think we would agree they were probably noisier. Are you happy with the level of -- I don't want to say satisfied, but are you pleased with the level of quiet in terms of where the quarters are today? And what we can reasonably expect?

Yes. Hi, David. I think, I do believe that the franchising business is quite predictable, and we shouldn't have a sizable onetime adjustments apart from sizable transformative events happening in our business like the spin-off and the La Quinta integration. And then, of course, a restructuring event related to something like a COVID. So yes, I'm pleased. I think you saw in the fourth quarter of last year and the first quarter of this year, we had very clean financials from a P&L and a cash flow perspective, and that's our expectation going forward.

Perfect. Look, Geoff, the franchising business, as I imagine it, and as I've always understood it to be, is super competitive, particularly limited service economy level. And I would expect that the current environment is more so, right? If you could just talk a little bit about sort of what your teams are seeing out there in terms of competitiveness, how you're positioning yourselves uniquely to compete? And I know, just as a follow-on to that, conversions are an important aspect to this. And my guess is those are pretty darn competitive also. What tools, what strategies, whatever insights?

Sure. Yes. Conversions are certainly competitive. Everybody is talking about it. Smith talks about the 200,000 hotels that are out there in the world. Booking talks about 0.5 million hotels. Bernstein is out there with an 800,000 hotel number universe, well over half of whatever number you look at are unbranded independent hotels. And if you take the 800,000 numbers, that's 90x our 9,000 hotels today, that are unbranded. Now many of those, as you know, are smaller hotels and they're not necessarily fit for our brands or suitable for conversion. But the question that really should be asked is where are there? What segments have the largest percentage? And the largest number of independent hotels? And the answer is clearly in the economy segment, where 63% of the independent hotels in the U.S.A. are in the economy segment. And we have a brand for each of those economy hotels. We have a brand for each of the mid-scale hotels, which is the next largest segment of unbranded hotels. So there's tremendous opportunity. But when it comes to the economy and the mid-scale segments that we're most focused on, we believe we have the best brands, the brands that are, from an awareness standpoint, the highest aided and unaided awareness, Days Inn, Super 8. From a RevPAR index standpoint, we -- our brands have never been in better shape. We just reported our franchise disclosure documents back a few weeks ago and to be able to report based on what you referenced, the work that we've been doing, taking out substandard lower quality hotels, '16, '17, '18, our RevPAR index for Super 8 now is at 103% as reported in our franchise disclosure documents. Our RevPAR index for our Days Inn brand, which our largest brand in the United States is now at 108%. And so size matters, scale matters. Loyalty program, which you asked about what we've done since spin, we've added 37 million members for that program. It's that ability to drive more direct contribution and to continue to provide franchisees in the United States, in the economy segment, in our brands now, over 40% of the check-ins every night are coming direct to the loyalty program, and it's a big competitive advantage for us in terms of what we could do to, again, not only drive market share but improve their overall structure, cost of distribution.

So the natural follow-up to that is my view, and I'm sure it's not particularly unique, is that the people have moved more in a digital direction permanently as an output of COVID. Do you feel like Wyndham is properly technologized on the platform side? And what would you consider to be the standout strengths or opportunities that you're focused on from a technology perspective?

Yes, it's a great question. And it's a question everybody is, I know in this industry, asking right now with everything that folks are worried about in terms of having best-in-class technology, making sure that you're as safe as you can be from a cybersecurity standpoint, which is certainly top of mind. We made the decision, as you and I have talked about repeatedly on so many different calls, 4 or 5 years ago to strategically decide that we could buy best-in-class better technology outside than we could develop internally in-house. With each acquisition came a new central reservation system or a new property management system, we outsourced all of that. We made the decision, which I think many of our large competitive chains, we've seen so many big companies make in -- in the last few years to outsource to best-in-class providers. We made the decision to move all of our disparate central reservation systems onto the Sabre platform. And it was heavy lifting and that was -- that decision was made in 2014, believe it or not. The work began in '16, continued through '16, '17, '18, and we're now able to say that all of our availability rate and inventory is on a system that is safe and secure and most importantly, connected to best-in-class property management systems from a technology standpoint that are encrypted, that do not require servers in the hotels, that have resident revenue management tools built into them, and that's freed up significant CapEx to focus on what's really important for us and our brands, which is delivering that consumer-facing technology. We've done so much. Our teams, our technology teams have achieved so much over this last few years from building a new customer data platform that really maximizes our return on marketing spend to drive more bookings. Our new Salesforce Lightning rollout, which is the latest version of Salesforce, enables all of our franchisees to have a much more automated workflow and improve their tool [indiscernible] to do on the app and we've talked a lot about our mobile booking app, which we believe is the fastest 3-step mobile booking app out there with geolocation. So it knows where the [indiscernible] are at all times and it's going to recommend that they pull over to one of our brands. It's that type of technology on both the leisure side and on the business side. We're really focused right now on the opportunity ahead with the new infrastructure spending and the investments that we've made with our new Wyndham Direct billing solution, which is allowing us to attract a lot more negotiated accounts. That's all made possible because of the investment we made 5, 6 years ago to outsource to best-in-class technology providers.

Perfect. As you're thinking about Wyndham a little longer term, can you talk about the specific segments that you think are going to bring you the best growth opportunities, which ones you are most excited about? And just as an add-on to that question, I think many of us on The Street wind up debating about company's ability to move up market, and whether consumers will come to Wyndham for things that are further upmarket than, call it, the meat of your bat at the moment. But I'd love to hear where the growth avenues really are.

Yes. We -- I mean we -- I mentioned earlier just how strong the growth has been from our upscale brands, our Wyndham-owned and our Dolce brands, and we have great upscale brands, and we -- upper-upscale and a lot of luxury brand that we just added with strong brand recognition and quality [indiscernible] providing growth both domestically and internationally. But again, I mean, our focus is in the select-service space. And we believe in the years ahead that our focus will remain in the select-service space. It is a space that we believe there is going to be the most growth in and is historically the most resilient. And again, it is having -- making sure that our economy and mid-scale brands from Days Inn up to La Quinta behind me, which has just been a really strong performer, continues to maintain that market share premium because I think that is where the demand for developers in the years ahead will primarily be. It will be in the select-service space where we have some of the best brands out there.

Perfect. Michele, I wanted to sort of lay one out there for you, which is on the fee structures. As we talk to the REIT community and the ownership community, throughout all of this, they've discussed the notion of trying to add flexibility, trying to add greater efficiencies to the fee structures that brands charge to them. If you could just talk about some of those interactions that have happened over the past 1.5 years and how they should feel better, how you feel about those outcomes, would be really helpful.

Sure. I would say our franchising business is already variable based by nature. So nearly all of our contracts are written as a percentage of hotel revenues. So if the hotel is not performing, then there are no fees that they're paying to us. They'll see a higher fee, obviously, in terms of higher occupancy and higher RevPAR. But in the slower seasons, they're going to be paying a much smaller fee since it is already variable. There are opportunities we do believe to introduce -- and we have been doing this, to introduce other services that are more consumption-based. For instance, our reservation -- our call transfer reservation platform where we can reduce on property cost for hotel owners by taking all the calls through our central reservation system and significantly reduces our front desk agent cost is a pay-for-performance platform. So you're only paying on actual consumed nights, so for stays and actual check-ins. And there are a number of programs that we have rolled out or are exploring, implementing in response to the current environment where they are more kind of pay-for-performance as opposed to a straight out monthly type of fee.

Understood. Now I do want to just get your comment on something that isn't necessarily on you, but we continue to hear and read quite a bit about the challenges of labor and the cost of labor, which I think should be on your franchisees more of a challenge than anything else. Is there any role that you can play or any help that you can provide in alleviating some of that?

Absolutely. And it's something our teams are highly focused on right now. We are -- Geoff can talk a little bit about what we just did with our breakfast standards and modifying those reduced costs on property costs. And there are a number of other programs that we have rolled out, such as putting in QR codes at all of our hotels to reduce again front desk labor costs and make the process of enrolling a new Wyndham Rewards member a lot more efficient. It also increases the likelihood of mobile app downloads, so there's kind of 2 benefits to something like that. But there are a number of different programs that we have -- we have put in place or are considering putting in place as we go through our consumer research and those are all designed to help alleviate the cost pressure that our franchisees are experiencing on the labor side, help to expand margins and then obviously, improve ROIC.

And look, I think one of the discussion points and you touched on this a bit, is from owners that we hear, particularly, as we move sort of farther down the pricing scale, is the notion of an à la carte offering in the franchise business. Is that -- I mean it sounds great, but is that -- I mean, is that realistically possible? And it's probably good to get a comment from both of you on that.

Well, Michele touched on it. There are so many fees that we could offer, David, that are à la carte, that are not mandatory, that are opt-in. I mean she touched quickly on our Signature Reservation Service. Think about how many calls go into front desks that don't need to go into front desks because they're a reservation call or they're an information call or they're a call that is taking a front desk agent, a guest service agent away from checking someone in or doing something more important on rates and inventory and revenue management. That call could be answered by a professional call center. And that's what our Signature Reservation System is all about. But if the franchisee does not have to pay unless there is revenue produced. And we could take as many calls because we have large call centers that we operate or that we outsource to [ best-in-class ], and we could make that à la carte and not charge the franchisee for them. On an opt-in basis, I think, Michele, we have 6,000 hotels in the United States. Over half of our franchisees have opted in because they know they only pay if we produce. They're paying 3% if we book a reservation and the guest actually shows up. If the guest calls and cancels before he or she shows up, they don't have to pay, and it's capped at, I think, $6. That's one of many à la carte options we could throw out there. We're doing the same thing right now for our sales teams. What -- La Quinta like this just opened in Littleton, Colorado, we've opened so many La Quintas that we've announced since the quarter ended, I think, half a dozen this quarter. If that La Quinta can opt in to have another salesperson, and it is that small business owner, that franchisee's decision to say, you could do this more efficiently or effectively in this market because you already have a team than I can. Those type of services, absolutely should be available to our owners, and we think we could do more of that.

Before I sort of get into the next question, I do want to talk just a little bit about kind of the macro and how quickly things are evolving. I mean the notion that I'm doing this from my office is remarkable to me, and I think 30 days ago, I would not have thought that. But I do want to just remind anyone who's tuned in that we do have a chat function if anyone has any specific questions, and we will make sure to do our best to field those if you want to click on the link or send those in, my e-mail is not open, so that's the one way to sort of get them into us. But as I indicated, the macro seems to be evolving almost on a weekly basis, not entirely on a weekly basis. What are some of the most recent data points? Or what are you seeing, expecting as we roll through the next few quarters in terms of mix, pricing, volumes, et cetera?

Yes. I mean all we have to do is just look at the continued off-the-hook leisure demand that's out there in the Smith Travel data. It's just stunning. I mean the economy segment just keeps getting better. It is certainly leading the way. It was great to see last week ending June 12 the mid-scale becoming the second segment to surpass 2019 full week RevPAR at being up 2%. I mean economy has been doing that for a while since we reported our last earnings on Smith, and it's great to see mid there. I think the other stat we continue to -- the data point is just the drive-to travel. I mean the drive-to Memorial Day traffic, again, was just off the charts. And more people are driving than flying in. It's frustrating to see the news this morning with American Airlines and so many flights having to be canceled. But again, 90% of our business is drive-to, 70% of it is leisure. And that is where we continue to think the focus is going to be going into the Labor Day. And then the question becomes what happens after Labor Day. And we think we're very well positioned there with our type of business traveler that really never stopped traveling and is actually picking up. The construction workers that are working crazier, longer, further away from home than ever, the logistics and trucking business, which is up to not only last year, but well ahead of 2019. I mean those type of workers are what we think will continue to allow our brands throughout whatever happens come to fall with white collar and office work we do see returning and it's great to see group business starting to come back. But we're feeling really good about how our brands are positioned right now, David.

All right. And we should probably put that question with respect, you have a little bit bigger Asian business than some of your direct peers. That's not the same fundamental environment as what we're seeing here in the U.S., is it? What are the -- what are we seeing?

Not at all. I mean China -- China last week was up 40% to last year. It slowed down a little bit. I think the last 4 weeks, Smith has been reporting it was a little bit stronger, but what we're hearing anecdotally from our crews over there is strong demand. Business travel is back. The only thing that is really lacking and missing, as we all know, and we're all talking about is that international inbound that's still somewhat restricted, some -- still somewhat curtail. But certainly, in the economy drive-to, which is 70% of our brands over there are, it's strong. It's really strong. I mean the May holiday travel was just huge for China and for the industry. I think it was stronger than most analysts predicted, and we're certainly hearing from our revenue management teams over there they managed, that they were able to sell out a lot more room nights this May than they were back in May in our big Wyndham Grand's, Wyndham's, Ramada's in the more upscale locations where there was tremendous demand.

Well, okay, Michele, we should absolutely just have a discussion about capital allocation. And for sure, the past 15 months have not been normal CFO capital allocation decisions. But how are you thinking about the next 12 months? And getting to hopefully make some more normal decisions?

I would say, at this point, our liquidity, our debt profile are -- we're pretty much back to prepandemic levels. So our capital allocation practice now is going to start to revert back to kind of pre-COVID times. So our first priority is to always invest in the business. We're going to be -- we're going to be targeting a net leverage ratio 3 to 4x. We think we're going to be right back within that range in the next 6 to 12 months easily just through EBITDA generation. We don't think that's going to be a capital deployment channel. We are going to target a dividend probably in the low to mid-30s, and top priority is getting our dividend back to the 2019 levels. So I think you'll see that come rather quickly. And -- and then any excess cash would be available for either M&A or a share repurchase program being returned to shareholders and the amount of which would likely very highly dependent on what type of opportunities emerge in the M&A space. And so we could see share buyback sometime throughout the year or if there was a compelling -- a compelling acquisition target or investment in the business, then we would -- that would be our first priority to allocate -- to allocate that excess cash to.

I'm going to have to follow that up because Geoff walks into your office and says, "I want to buy X," and it's what -- and your response would be, "Okay, as long as it meets X,Y and Z, and maybe the whole alphabet." What are those? What's that alphabet look like?

So I don't -- I'm not sure I'm going to give away the secret sauce, but I will say that when I -- when we talk about compelling returns, obviously, it needs to be -- from a financial perspective, it's going to need to be something that's well in excess of our weighted average cost of capital and our internal hurdle rates. There needs to be a strategic fit, and it's going to have to be a brand that we can grow. And so those are the couple of items that I think we're comfortable talking about in a public forum. And obviously, there's a lot more that kind of goes into the background of determining how it fits into our strategic priorities.

Excellent. It looks like we're inside of a minute left, Geoff, and I just want to give you the last word in case there's anything we didn't touch on that you want to make sure everyone gets to hear.

Well, no. Thanks, David, for having us today. I mean this year has been remarkable. I think what we've continued to prove is just the resiliency of our leisure-based, drive-to business model with really strong brands that continue to outperform, and we look forward to continuing to do everything we can as a leadership team to make sure that they remain on that track.

All right. Thank you ever so much for participating with us. I'm sure you're going to have a productive day, and thank you to everyone for tuning in.

Thanks for setting up, David.

Thank you, David.

All the best.