Wyndham Hotels & Resorts, Inc. (WH) on Q2 2021 Results - Earnings Call Transcript
Operator: Welcome to the Wyndham Hotels & Resorts Second Quarter 2021 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation. I would now like to turn the call over to Matt Capuzzi, Senior Vice President of Investor Relations. Matt Capuzzi: Thank you, operator. Good morning and thank you for joining us. With me today are Geoff Ballotti, our CEO; and Michele Allen, our CFO. Before we get started, I want to remind you that our remarks today will contain forward-looking statements. These statements are subject to risk factors that may cause our actual results to differ materially from those expressed or implied. Geoff Ballotti: Thanks, Matt and thanks everyone for joining us this morning. We were very pleased with our second quarter performance where global Rev PAR increased 110% versus last year, and where our domestic economy Rev PAR exceeded 2019 by nearly 4%, increasing every month versus both last year and the year prior. For the month of June, not only the domestic economy Rev PAR increased 680 basis points compared to June of 2019. But overall domestic system, including our many upscale and upper upscale brands, exceeded June of 2019 by 70 basis points. This was the first month that this has occurred since back in February of 2020. With improving leisure demand combined with a continued market share outperformance of our brands and the structural cost savings from our 2020 organizational restructuring. We generated $168 million of adjusted EBITDA, which was more than we generated in the second quarter of 2019. We delivered another clean quarter on both the P&L and cash flow fronts with free cash flow this quarter of $104 million, increasing $264 million from the second quarter of 2019. We opened 9,800 rooms which was nearly 30% more rooms than we opened in the first quarter and over 70% more rooms than we opened last year. With strategic removals of non-profitable licensees now behind us, terminations were 57% lower than last year. We awarded 154 new hotel agreements, which was over 30% more than last year and only 10% below the number of contracts we awarded in the second quarter of 2019. The continued pickup in our development team successes around the world resulted in a 170 basis points of sequential pipeline growth and 580 basis points of year-over-year growth in our development pipeline, which climbed to over 190,000 rooms at the end of June. Michele Allen: Thanks, Geoff. And good morning, everyone. I'll begin my remarks today with a detailed review of our second quarter results. I'll then review our cash flows and balance sheet followed by our 2021 outlook. During the second quarter we generated $321 million of fee related and other revenues and $168 million of adjusted EBITDA. Second quarter Rev PAR has now recovered to 83% of 2019 levels down only 5% domestically and down 44% internationally on a constant currency basis. My remarks today on Rev PAR will be focused on performance as compared to 2019. Operator: Our first question will come from David Katz with Jefferies. Please go ahead. Your line is open. David Katz: Hi, good morning, everyone. Congrats on the quarter. I wanted to start-off, if I may, with capital returns and the dividend increase. When I look at our model and sort of where we think we should be this year next year and beyond, getting to sort of a mid-20s payout against the free cash flow that we're modeling. Michele, if you could just help us think through what might be a reasonable path for that dividend. And maybe we've had a little discussion about, how you all are thinking about share repurchases over time? Michele Allen: Sure, David. Good morning. So, from our perspective the $0.24 per share dividend payment would round out to just above the mid-30s, I believe, when we look at a net income payout ratio, that's the way we're thinking about the dividend. With these two increases, we should now be at about 75% of our pre-pandemic level. And that is right in line with how our earnings have been recovering. From a capital allocation perspective, I would say, as always, our first preference is to invest in the business for future growth from leverage, we target 3 to 4 times we expect to be back within that range at the end of this year. And so we don't see any need to allocate capital to debt repayment. And then it comes down to dividends, whether or not there are any other M&A opportunities out there and then, of course, share repurchase. We feel comfortable with where the dividend is right now. And so that really leaves us with M&A and share repurchase. There are no restrictions and share repurchase today. We have $191 million available under our current authorization and we expect we hope to be in the market this quarter. David Katz: Perfect. And if I may follow up, one for Geoff. Your -- I think it's still your largest franchisee has been -- I believe exploring alternatives as they've announced it. Is there anything that you were able to say about what that could potentially mean for you? Geoff Ballotti: David, it wouldn't be appropriate for us to come and certainly on their process. Their press release last week or the week before noted that they're reporting sequentially improving performance. And they're on track to sell down to 105 hotels, in terms of what it means for us going forward, we anticipate that those core hotels they talk about will remain a part of the Wyndham family as managed hotels and franchise agreements, as have all been one of the tickets 135 or 136 hotels that they have sold to-date. The hotel management agreements do not have any change of control provisions. And there are no automatic cross term rights between RHMS and franchise agreements. And look they're some of their best hotels in solid locations, and we anticipate that they'll remain as part of the Wyndham family going forward. David Katz: Okay, perfect. Thank you very much. Geoff Ballotti: Thanks, David. Operator: Your next question comes from Joe Greff with JP Morgan. Please go ahead. Your line is open. Joe Greff: Hi, good morning Geoff and Michele and Matt. Want to talk about net earnings growth that -- the long-term targets in the slide deck going from 1 to 2 and 2 to 4, and then over time 3 to 5. But I have a more specific question. Looking at your current pipeline of 190,000 rooms and maybe given what you're seeing on conversions, which probably not completely reflected in the development pipeline, given the short-term nature of conversion. Is there a reason why you couldn't open the same number of gross rooms in ‘22 that you opened in 2019? Geoff Ballotti: There's no reason in ’22, I mean to in terms of where we are right now on our 1% to 2% we were feeling very good as we previewed last call. Joe our rooms would be back-end loaded. The -- our 10,000 rooms that we opened in the quarter were 30% more than we opened last quarter. And we're still expecting to open over 50,000 rooms this year, which would be 80% over 80% of what we opened back in full year 2019, when we ran 3% net room growth and with over a third of that 50,000 rooms now achieved, we feel as we said in the script seasonally on pace with our historical trends. And in terms of what we're seeing on the conversion front, it just continues to pick up conversion rooms as a percentage of our total continued to increase from 50% of our global room openings last year to 70% this year and increased to where we -- what we opened 500 basis points over what we opened in the second quarter of 2019 in conversion activity. So no, there's no reason in terms of 2022 that we couldn't be back. Joe Greff: Great. And then my question here is, Michele you mentioned that the back half of ‘21 Rev PAR guidance implies getting back to 19% of 2019 second half Rev PAR levels. Is there a 3Q is that much higher the percentage, kind of where I'm going with this is trying to understand sort of the mix between leisure and your business in 3Q as a transition for the 4Q mix. But is that how you're looking at it is that as a percentage of 2019 3Q will be stronger than 4Q because of the mix? Or is there something else that is -- that you need to be mindful of when thinking about it as a percentage of 19 between those two quarters? Michele Allen: No, Joe, I think you have it the -- in the third quarter, we certainly have our greatest pricing power. And so that will be -- that will definitely be a higher overall Rev PAR than the fourth quarter. I do not think our -- actually I know our business and leisure mix does not change dramatically between the third quarter and the fourth quarter. So it really just comes down to overall demand levels and then the ability to push the price based upon those demand levels. If you think about it from a seasonality perspective, though at the EBITDA line, the 2019 we generated about 30% of our full year revenue, I'm sorry, our full year EBITDA in the third quarter and about 22% in the fourth quarter, I would expect that 2021 would follow a similar pattern Joe Greff: Thank you. Michele Allen: You’re welcome. Operator: And we'll take our next question from Stephen Grambling with Goldman Sachs. Please go ahead. Your line is open. Stephen Grambling: Hey, good morning. Thanks for taking the question. I guess as you think about the strength of your Rev PAR index across brands and strength of the loyalty bookings. Because where are you thinking about reinvesting back into the system and other opportunities to either change improve or monetize the loyalty program in a recovery? Geoff Ballotti: Sure. Thanks for the question, Stephen. There's absolutely opportunity to both continue to invest in driving our Rev PAR index. We think that what we've talked about before in terms of the investments we've made on the technology in the marketing front, we've talked on the last call, I won't go through them again, the four big investments we made on the customer data platform on our sales force lightning rollout on our mobile booking app on our Wyndham direct billing solution, which is going to be so important moving forward, we think for gaining more share from infrastructure accounts. And the continued investments we're making on technology. I mean, this quarter, we rolled-out new property management cloud options through cloud and we believe several property hub will have the fastest check-in and check-out and we'll be the first for economy midscale hotels with single image inventory not requiring any two-way interfaces. So those are all we believe investments that have been driving that outsized share gain that we've seen up another 300 basis points this quarter. In terms of what we're doing on the Wyndham rewards side. We've talked a lot about how we are attracting under travelers we are seeing our marketing teams catch the much wider net as we talked about our script to target millennials to really move them up the marketing funnel. I mean, the video played is massive right now in terms of the role it's playing in attracting those travelers and grow really leading into insights and automation with Google for example across all of their search and display and YouTube channels to get a clear picture is coming from and on Alphabets called yesterday that they two days ago, two nights ago they talked about Wyndham driving two times a number of direct bookings at a lower cost of that acquisition which is generating incremental impressions that millennials are seeing on, on their devices so to the extent that we can roll those millennials into Wyndham rewards we believe that we could continue to grow and we added another 2 million members this quarter to Wyndham rewards, we could continue to grow that program and grow that all important shared occupancy which is now contributing roughly one out of every two check-ins. Stephen Grambling: That's helpful. And then if follow up to Joe -- okay. Michele Allen: I would just add to that. We're -- we continuously evaluate the loyalty program to determine the relevance of it given current market dynamics. And from an investment perspective, Geoff hit on all the key points for how we're investing in capturing greater market share. And I would also say we are making investments on the development side, we had already increased the amount of money we allocate to development advances. And so we're now earmarking $40 million a year for that. And we are looking at deploying that capital not only to attract new developers, but also to attract developers that previously had not done business with us before, as well as to continue to improve the quality of -- the overall quality of our brands. Stephen Grambling: That's helpful. And maybe that's a good segue in terms of a follow up to Joe's question that unit growth, are you still seeing -- have you seen any changes in the financing market for new construction? Geoff Ballotti: We're finding that financing is still out there for franchisees that are looking to develop. We haven't seen any developments in our pipeline fall out yet. Because any significant anything different than were anything out of the ordinary from the past. And there certainly is, we believe still opportunity out there, especially within our community for financing. It's a very, local, -- much more localized and regionalized lending environment than it is in the more upper upscale markets. Stephen Grambling: Super helpful. Thanks so much. Geoff Ballotti: Thanks, Stephen. Operator: We'll take our next question from Gregory Miller with Truist Securities. Please go ahead. Your line is open. Gregory Miller: Thank you. Good morning, Geoff and Michele. I am I want to start-off with hotel staffing and labor costs. What was obviously a big industry topic. Can you share on how material of an issue this is for your franchise is today? And is it fair to say that the challenge to be higher is less than a headwind for many of your economy and midscale hotels? Geoff Ballotti: I think it is fair, Greg, thanks for the question. For our economy and midscale hotels, it's certainly as we talked about, on the last call much less of an issue in the select service space. Our economy and midscale hotels do not have restaurants. They do not have banqueting halls, they do not have convention facilities. And look, labor has been an issue in this industry long before the pandemic. Before COVID back in ‘19, our industry had 10 million jobs available and only 9 million of them were filled. But it is certainly at what is estimated to be in the economy segments 12% of gross operating revenue as -- from a cost basis to your question versus 35% of gross operating revenue for the overall U.S. industry. It's still very much an issue. And it's been the driver of so much of what our teams have been working on the elimination of breakfasts for our large economy brands, which have reduced our economy breakfast cost for our franchisees by around 50%. The stay over cleaning on request, which has certainly helped and then embraced by Franchise Advisory Council. And we will continue to focus on and trying to eliminate other costs as we move to more digital to drive additional savings for our franchisees. But yes, I mean, our industry needs more housekeepers. We need more guest service agents. We need more culinary team members. And our operation support teams are working very hard to educating our owners on what they can be doing from a daily labor monitoring basis. We've got a lot of tools and software out there. What we could be providing to attract employees and associates better benefits workers flexibility, and how we could leverage staff among neighboring hotels. Our franchisees, our small business owners are working very hard at recruiting and trying to get the word out on just what a great industry this is. Gregory Miller: I appreciate all the insights. And as you mentioned the housekeeping piece as my follow up, do you anticipate falling one appears and making the overnight housekeeping cleaning permanently optional for your hotel? Geoff Ballotti: I think that's where the industry is heading. I again working with our Franchise Advisory Councils. We are providing room cleans on a request basis which has been well received by obviously franchisees, but also by guests right now in terms of guests not necessarily wanting folks in we're certainly as a standard providing clean on longer stay over on every third day. But I think your points well taken. I think that's probably where this industry is headed. Gregory Miller: Right. I appreciate all the color. Thanks. Geoff Ballotti: Thanks Greg. Operator: And we'll take our next question from Ian Zaffino with Oppenheimer. Please go ahead. Your line is open. Ian Zaffino: Hi, great. Thank you very much. The first question may be for Michele. On the free cash flow generation I guess can you just talk about the roll office and the costs and how we're supposed to be looking at the cash flow going forward. I know there is integration hits, there was another one-time items. Just help us think about going forward puts and takes potential one-timers etc -- Michele Allen: Sorry. special item cash outlays, those one-timers are behind us. So at this point, we should just be converting cleanly from EBITDA, our guidance implies -- actually our guidance is 55% approximately 55% of our adjusted EBITDA will convert to free cash flow. And that's what you should expect for 2021. Ian Zaffino: Okay. And then, we talked about net room growth, can you actually disaggregate that maybe between terminations and strategic removals gross adds I guess. And then also, just have one more topic that slammed in there is, how you kind of pacing versus your $40 million costs base target? Thanks. Michele Allen: On the $40 million of costs base our outlook assumes full achievement of that $40 million and we're tracking precisely on target to that achievement. I'll hand the call over to Geoff to talk about network growth? Geoff Ballotti: Yes, we would expect in the -- the 4Q is always our heaviest quarter for openings in and we would expect that we're on -- we're pacing, right where we want it to be on termination 60% fewer than last year and over 20% fewer than in the second quarter. So we do believe we're on track to get back to that economy and midscale segment leading 95% retention rate that we've always what we enjoyed in 2018 and 2019. In fact, back in 2019, we're heading domestically to that 96% retention rate. So again, we're pleased with the progress and we think we're in line with the 2021 that room growth expectations. Michele Allen: There should be no additional strategic terminations. Ian Zaffino: Okay, great. Thanks, guys. Appreciate that. Geoff Ballotti: Thanks, Ian. Operator: And we will take our next question from Michael Bellisario with Baird. Please go ahead. Your line is open. Michael Bellisario: Thanks, good morning, everyone. Geoff Ballotti: Good morning Mike. Michael Bellisario: Just wanted to go back to your comments on development front. You are so kind of pair that with what you're seeing in terms of signings but maybe you dig a little deeper into what's going on domestically versus internationally. And if maybe you're seeing any relative weakness abroad, given a sluggish recovery there versus that better performance that you're seeing -- any outlook? Geoff Ballotti: Yes, we’ve been very pleased and surprised, actually with despite what we're seeing in the press, in terms of sluggishness, how the pipelines have built across the world. But to begin, domestically, our pipeline, as we talked about, was up about 6% domestically and 6%. internationally year-on-year and it was up on a sequential basis more internationally up 230 bps internationally up 70 bps sequentially. Domestically, we saw a 6% growth year-on-year, as I said, but 20% growth in conversion which was great to see. Our China pipeline year-on-year was up 11% and our Latin America pipeline was up 15%. In Latin America, our conversion pipeline was up 23%. Europe was from a conversion standpoint, our biggest standout, that pipeline was up 16%. But conversion rooms were up over 75% with Ramada being a real big beneficiary of it. So conversion rooms in the pipeline, were up both sequentially and year-on-year. And I guess what we were somewhat surprised with was still the growth of new construction, our new construction pipeline grew 4% from 135,000 rooms to over 140,000 rooms. And we've been focused internationally on -- certainly, as we've opened new offices, we've been adding more franchise sellers, they've been focused on direct franchisee. And we've been adding a lot of new brands to countries that they haven't been in before, since our spin with added brands to 50 countries where we haven't sold direct franchising agreements before. And we're seeing a lot of success overseas as we certainly have on a new construction basis here in the U.S. with our new construction brands, Lakita, Microtel. And in our dual Microtel Lakita and Hawthorn Suites brand. Michael Bellisario: Got it. That's helpful. And then just one more for me, just on the master franchise agreements that you have in China, has your view changed at all on that potential investment opportunity? And maybe how do you waive some of the headline risks that seem to have resurfaced recently there? Geoff Ballotti: On the -- yes go ahead Michele. Michele Allen: No please Geoff you first. Geoff Ballotti: Yes, I mean, we're certainly monitoring the headline risk. But we're certainly not anticipating or seeing anything that is impacting us on the development front. Michele? Michele Allen: And I would say our view hasn't changed it. We continue to be the logical buyer of that master franchise agreement. But at this point, we're happy with the production and how they're growing the system. Michael Bellisario: Understood. Thank you. Geoff Ballotti: Thanks, Mike. Operator: And we will take our next question from Dany Asad with Bank of America. Please go ahead. Your line is open. Dany Asad with Bank of America. Your line is open Dany Asad: Hey, good morning, Geoff and Michele. Geoff Ballotti: Hey, Dany. Dany Asad: I'm just trying to think of the like the undercurrents below that Rev PAR expectation of being 10% below ‘19 for the back half of the year. Can you – could you just help us understand the cadence of what, like – of that progression whether it's domestic versus international or leisure versus corporate for the balance of the year? Geoff Ballotti: Sure. Yes, I'll -- I mean, it's the question on everybody's mind. And then I'll let Michele give her thoughts on cadence and tie it back to the outlook that she talked about. I mean, look, we believe leisure demand, Dany is going to stay very strong into the fall. For all the reasons that we've talked about the pent up demand and working for many were longer multi night bookings longer average length of stay, we believe domestic economy Rev PAR will continue to outpace all the other segments as it has for the past four months. And certainly through the COVID case spikes of last fall, if you look at Slide 7 in our IR deck that we sent out last night, you'll see that, those spikes have not stalled that demand. And we also feel that our type of business traveler who just never stopped traveling throughout the pandemic will continue to travel and into the fall and could certainly accelerate with the pending infrastructure package that was approved by the Senate Network. There's still some work to do there but moving along. But when we look at on an overall basis, our domestic Rev PAR, we believe that will continue to trend how it's trending now and internationally, we're certainly seeing good fundamental pickup with China leading a way and with U.S. airlift to Europe picking up and certainly inner European lift, picking up from the two Orion's what we're seeing Germany improve from down 70% in June down 50% July month to-date. U.K. has been the standout which was down 30% in June, it's down only 10% July month to-date. And where we're -- where we have significant presence in Turkey -- in countries like Turkey. We're seeing significant improvement there as well. Much of that being said by the leisure demand. Dany Asad: Thank you very much. Operator: And our final question comes from Alton Stump with Longbow Research. Please go ahead. Alton Stump: Thank you. Good morning, everyone, the quarter, I guess as a follow up to that last question or -- to the discussion, in question mentioned, although it's only, obviously a three week period, but that Europe 7% domestically, instead of outlook on, what the best could do in the back half versus 2019. Obviously, downtown overall, but, I would presume that will probably be positive domestic growth or based on that to get your down 10% overall? Michele Allen: I think we will absolutely see stronger domestic performance than we see in the back half than international although our guidance does assume continued trends in the U.S. and improving trends overseas. So yes, I think the domestic number will be much stronger than the international number. Alton Stump: Great, thank you, Michele. And then just a quick follow up on that just occupancy versus ADR integrate as move in , it's a fourth quarter, is there anything that you would rather see improved faster? Or is it just a matter of both improving extreme more pace? Michele Allen: Yes, we'd love to see them both improved faster, but we are very pleased with how our franchisees have been optimizing rate in this growing demand environment and that is something we expect to continue to see throughout the rest of the year. Alton Stump: Okay, great, thanks Michele. Michele Allen: Thank you. Operator: And there are no further questions, I'll turn the call back over to Geoff Ballotti for any closing remarks. Geoff Ballotti: Thank you, Ashley. And thanks, everybody for dialing-in. We look forward to speaking with many of you in the weeks ahead and hopefully seeing a few of you at the Asian American Hotel Owners Association Conference next week in Dallas, where Michele and I will be in the booth all week with our franchise sales team. And then the following week, we'll be down in Greensboro, North Carolina with our top customers and developer prospects at historic Sedgefield Country Club for the playing of the 15th Wyndham Championship, the last stop on a PGA Tour before the playoffs. You could certainly catch it live on the Golf Channel and CBS from August 12th through the 15th. enjoy the rest of your summer everyone and thanks again for your interest in Wyndham Hotels and Resorts. Operator: Thank you. And this does concludes today's program. Thank you for your participation. You may disconnect at any time.WH Ratings Summary
WH Quant Ranking
Related Analysis
Wyndham Hotels & Resorts Earnings Beat EPS Estimates Amid Revenue Challenges
Wyndham Hotels & Resorts, Inc. (WH:NYSE) Earnings Overview
Wyndham Hotels & Resorts, Inc. (WH:NYSE) recently reported its quarterly earnings, showcasing a mix of achievements and challenges. The company's earnings per share (EPS) of $0.78 exceeded the Zacks Consensus Estimate by 4%, marking the fourth consecutive quarter of surpassing consensus EPS estimates. This performance is a testament to Wyndham's operational efficiency and its ability to navigate the complexities of the hotel and motel industry. However, despite this achievement, the company's revenues of $305 million for the quarter ended March 2024 fell short of expectations by 1.32% and also saw a decline from the previous year's revenues of $313 million. This discrepancy highlights the ongoing challenges Wyndham faces in generating top-line growth amidst a competitive and ever-changing market landscape.
The stock performance of Wyndham Hotels has seen a decline of about 11.1% since the beginning of the year, underperforming against the broader market as represented by the S&P 500's gain of 6.3%. This underperformance can be attributed to the mixed earnings outlook for the company, with analysts projecting an EPS of $1 on revenues of $374.62 million for the coming quarter, and an annual EPS of $4.19 on revenues of $1.45 billion. Despite these projections, the company's current Zacks Rank of #3 (Hold) suggests that it is expected to perform in line with the market in the near term. This rank, coupled with the stock's recent trading activity, where it experienced a slight decrease of $0.63 to $73.25, reflects investor caution and the need for Wyndham to address its revenue shortfalls and capitalize on its industry's growth prospects.
The broader Hotels and Motels industry, where Wyndham operates, is ranked in the top 38% of over 250 Zacks industries. This favorable industry outlook, along with the anticipation of earnings reports from other industry players like Playa Hotels & Resorts (PLYA), underscores the potential for growth and recovery within the sector. Wyndham's position within this context is crucial, as it navigates through industry challenges and leverages its strengths to enhance shareholder value. The company's dividend offering, with a yield of 2.02%—significantly higher than the industry average and the S&P 500—further highlights Wyndham as a notable dividend stock, appealing to investors seeking income in addition to capital appreciation.
Moreover, Wyndham's commitment to dividend growth, with an annualized dividend of $1.52 marking an 8.6% increase from the previous year, and a consistent annual growth rate of 18.55% over the past five years, positions it as a resilient player in the market. The company's payout ratio of 35% indicates a sustainable approach to returning value to shareholders while retaining enough earnings to fund future growth. This balance between dividend payouts and reinvestment in the business is critical for Wyndham's long-term strategy, especially as it aims to capitalize on the projected earnings growth of 4.49% for 2024. As Wyndham continues to navigate the complexities of the hotel and motel industry, its dividend strategy and industry positioning will be key factors in attracting and retaining investors, particularly in a market environment where high-yielding stocks are increasingly scrutinized amidst rising interest rates.
Wyndham Hotels & Resorts Shares Underperformance is Overdone
Deutsche Bank analysts started coverage on Wyndham Hotels & Resorts, Inc. (NYSE:WH) with a Buy rating and a price target of $79, noting it believes the recent underperformance in shares is overdone and primarily related to regional banking concerns on funding availability for development/unit growth.
According to the analysts, this underperformance offers investors an entry point, adding that it believes fears over the net unit growth outlook and pipeline are exaggerated. At present, the Wyndham pipeline is the healthiest it has ever been, up 13% year-over-year, which, the analysts believe, should drive accelerating net unit growth moving forward.
In addition, the analysts view the company’s select service chain scale exposure as more defensive in a downturn, relative to full service, with select service RevPAR outperforming by approximately 840 basis points on average, over the last three downturns.
