Playa Hotels & Resorts N.V. (NASDAQ:PLYA) Q4 2022 Earnings Call Transcript

Playa Hotels & Resorts N.V. (NASDAQ:PLYA) Q4 2022 Earnings Call Transcript February 24, 2023

Operator: Good morning, everyone, and welcome to the Playa Hotels & Resorts Q4 2022 Earnings Conference Call. All participants will be in a listen-only mode. Please also note today’s event is being recorded. At this time, I’d like to turn the floor over to Ryan Hymel. Please, go ahead.

Ryan Hymel: Thank you, Jimmy. Good morning, everyone, and welcome to Playa Hotels & Resorts Fourth Quarter 2022 Earnings Conference Call. Before we begin, I’d like to remind participants that many of our comments today will be considered forward-looking statements and are subject to numerous risks and uncertainties that may cause the company’s actual results to differ materially from what has been communicated. Forward-looking statements made today are effective only as of today, and the company undertakes no obligation to update forward-looking statements. For discussion of some of the factors that could cause our actual results to differ, please review the Risk Factors section of our Annual Report on Form 10-K, which we filed last night with the SEC.

We’ve updated our Investor Relations website at investors.playaresorts.com with the company’s recent releases. In addition, reconciliation to GAAP of the non-GAAP financial measures we discuss on this call were included in yesterday’s press release. On today’s call, Bruce Wardinski, Playa’s Chairman and Chief Executive Officer, will provide comments on the fourth quarter, demand trends and key operational highlights. I will then address our fourth quarter results and our outlook. Bruce will wrap up the call with some concluding remarks before we turn it over to Q&A. With that, I’ll turn the call over to Bruce.

Bruce Wardinski: Great. Thanks, Ryan. Good morning, everyone, and thank you for joining us. The fourth quarter capped off Playa’s best year in a relatively short history as we continue to execute on our strategic objective of increasing the value and service we provide our guests while yielding ADR appropriately as demand and awareness of our high-quality resorts continue to build. Despite persistent fears of a potential slowdown in leisure travel, our business performed well during the fourth quarter, and our net bookings for the Playa owned and managed properties have reached new weekly highs so far in 2023. We have seen no noteworthy changes in cancellation activity. But as we have previously stated, we will adjust our cost and operating protocols accordingly if there were to be a pullback in guest demand.

Playa generated the highest fourth quarter adjusted EBITDA and owned resort EBITDA margin in the company’s history, as our compelling value proposition continued to resonate with travelers as evidenced by our ADR growth compared to 2019, accelerating to approximately 67% on a reported basis or approximately 46% on a like-for-like basis, adjusted for portfolio mix and non-cash adjustments. I’d like to note that these ADR gains coincide with our own and third-party NPS scores reaching new highs, a true testament to the attractive value proposition of the all-inclusive experience, particularly in an inflationary world. As I mentioned before, although our headline ADR growth compared to 2019 has been robust, the headline growth in the fourth quarter benefited by approximately 20 percentage points from non-cash adjustments, asset dispositions of lower ADR resorts and the addition of our Hyatt Cap Cana resort.

These are important considerations when contemplating our ADR growth sustainability and the compelling value we continue to offer our guests. It is also worth noting that the absolute underlying ADR dollar change versus 2019 during the second half of 2022 was less than $100. Strategically, we still believe that seeding some occupancy in favor of ADR, mainly at our Hyatt resorts, is the best path forward for Playa, as it establishes us as the rate leader from a competitive standpoint in our respective markets, is more manageable from an operations perspective and improves the overall guest experience. Fourth quarter fundamentals exhibited a sequential acceleration in growth versus the comparable period in 2019. And on a year-over-year basis, with healthy occupancy and broad-based ADR strength leading to year-over-year margin improvement despite the difficult expense inflation environment, lapping record fourth quarter margins from the prior year and the impact of hurricane-related closures — resort closures in the Dominican Republic.

Jamaica had another strong quarter as the recovery accelerated during the fourth quarter with underlying ADR growth versus 2019, roughly in line with the Yucatan segment and occupancy levels higher than Q4 ’18, ’19 and ’21. As a reminder, Jamaica removed COVID-related travel restrictions requirements during the second quarter of 2022, and we anticipated that Jamaica would see demand accelerate as this was our best performing segment prior to the pandemic, and we didn’t believe there were any structural issues that would prohibit demand from recovery. The pace of the recovery in Jamaica has been stellar, and we hope to carry the momentum going forward, particularly as the MICE segment there continues to recover. Aided by a higher mix of groups, I am optimistic that the recovery in Jamaica has a healthy runway.

In Mexico, the Yucatan led the way on occupancy and saw underlying ADR growth versus 2019 of nearly 50%, while the Pacific Coast reported another quarter of robust ADR growth, up 24% year-over-year, also aided by the highest fourth quarter group mix we have experienced in that segment. In the Dominican Republic, following the temporary closure of several resorts late in September due to the impact of Hurricane Fiona, we reopened all of the disruptive resorts largely ahead of schedule during the fourth quarter. The properties reopened better than ever. And more importantly, we experienced little to no slippage in booking demand. Finally, over the past few months, we assumed management of the two resorts in the DR that were previously managed by a third party on our behalf and rebranded them as the Jewel Palm Beach and Jewel Punta Cana, respectively.

As is usually the case, there was significant disruption during the transition process as the resorts were handed over to us as largely blank slates with insignificant revenues on the book. In addition, we decided to perform some renovation work during the transition period that is not materially expensive from a capital perspective, but will require one of the resorts to be closed for a short period of time in the first quarter. I will discuss our plans for these resorts later on the call. As of mid-February, our Playa owned and managed revenue on the books, excluding the two new Jewel properties in the DR for both the first and second quarter is pacing up over 30% year-over-year, with ADR gains accounting for roughly one-third of the increases.

It is important to note that these figures include the impact from the resorts we temporarily closed in the Dominican Republic as a result of necessary repair work related to Hurricane Fiona. During the post-pandemic period, we began to experience a slight change in our typical seasonal demand patterns as the summer period saw less of a dip in ADR versus high season, which we believe would be largely structural and sticky going forward because, frankly, we were previously too inexpensive relative to the product offering and a more pronounced seasonality will likely reemerge as a result of demand pushing up high season pricing, not necessarily as a result of a drop in third quarter pricing as the value is now being better recognized by the consumer.

With that in mind, our third quarter revenue on the books is pacing up over 20% year-over-year, with ADR up high single digits, again, driving a significant portion of the increase. We are pleased with our revenue and ADR pacing, which have continued to build since our last earnings call. We are also pacing well ahead of last year in the MICE Group segment, with further potential to drive more MICE business in that segment in the second half of the year. Shifting to bookings. Our focus on direct channels continues to pay off, and we are confident that Playa is on target with our five-year plan to increase transient consumer direct business to at least 50% by 2023. In aggregate, during the fourth quarter of 2022, 43.2% of Playa managed room nights booked were booked direct, up 160 basis points year-over-year, growing year-over-year for the second straight quarter.

Excluding group business, approximately 47% of our Playa managed room nights booked were generated via direct channels. During the fourth quarter of 2022, playaresorts.com accounted for approximately 15% of our total Playa managed room night bookings, continuing to be a significant factor in our customer sourcing and ADR gains. Taking a look at who is traveling, a little less than 40% of the Playa managed room night stays in the quarter came from our direct channels, as our group and OTA mix improved year-over-year, though our OTA mix remained depressed compared to pre-pandemic levels. Geographically, the biggest change in our guest mix during the fourth quarter was the resurgence of our Canadian guest mix, which was up approximately 7 percentage points year-over-year, nearing pre-pandemic Q4 mix levels.

Our U.S. guest mix was steady year-over-year, remained significantly higher than the pre-pandemic period. Our European sourced guest mix was down significantly year-over-year, but in line with pre-pandemic levels. If you recall, we had a rather large surge in European source guests during the fourth quarter of 2021, particularly from Ukraine and Russia, which subsided during 2022. Our Asian source guest mix improved modestly year-over-year but remained the most depressed as it is only about 20% to 25% recovery. Our booking window of over three months was slightly longer than Q4 2019 as a result of the robust pacing figures we have been sharing with you in our prior earnings calls. Once again, I would like to sincerely thank all of our associates that have continued to deliver world-class service in the face of pandemic-related challenges.

Their unwavering passion and dedication to service is what truly sets Playa apart. Finally, on the capital allocation front, as you may have seen, our Board of Directors reauthorized a $100 million share repurchase program in September of 2022, given the recovery in the business, moderating leverage ratios and the attractive valuation of our stock. After the reauthorization, we repurchased approximately 7.8 million shares during 2022 and another approximately 1.5 million shares in 2023 or approximately 5.5% of the diluted shares outstanding as of the end of Q3 2022 for total proceeds of approximately $56 million. Given the current valuation of Playa stock, share repurchases have played a bigger role in our capital allocation decisions versus ROI CapEx projects.

Taking into consideration the repurchases to date and the company’s expected cash generation, our Board of Directors recently approved a new $200 million authorization to provide ample flexibility with respect to the company’s capital allocation. While we still fully intend to pursue capital projects, their hurdle becomes that much higher when the stock is so disconnected compared to fundamentals. Also, as part of the capital allocation framework, we have decided not to pursue a significant renovation and repositioning of the two Jewel properties we recently took over in the DR, and instead have engaged a broker with the goal of selling the properties in 2023 and to use the proceeds to further fund high priority projects and to continue to repurchase shares.

In the interim, we are confident that we can return these properties to profitability as we increase our sales efforts. With that, I will turn the call back over to Ryan to discuss the balance sheet and our outlook.

Ryan Hymel: Thank you, Bruce. I’ll begin with our capital markets activity during the fourth quarter. And I’m pleased to share that we completed a refinancing of our total debt stack during the fourth quarter, replacing our previous term loan due 2024, our property loan due ’25 and revolving credit facility, replacing those with a new $1.1 billion term loan maturing in January of ’29 and a new $225 million revolving credit facility, replacing our prior $60 million line. The new capital structure provides us with ample flexibility and liquidity to continue investing in high-return, all-inclusive projects, repurchasing shares and greatly improves our ability to plan our project runway going forward. We finished the year with a total cash balance of $284 million following the completion of the refinancing.

We currently have no outstanding borrowings on our revolving credit facility, and our total outstanding interest-bearing debt is $1.1 billion. Our net leverage on a trailing basis stands at 3.4 times. We anticipate our cash CapEx spend for full year 2023 to be approximately $55 million to $65 million for the year, partitioned out between roughly $35 million to $40 million for maintenance CapEx and the remainder to more ROI-oriented projects. On the capital allocation front, as Bruce mentioned, our Board of Directors reauthorized $100 million share repurchase program back in September of ’22. And as of January 31, we’ve repurchased $56 million or 9.4 million shares under that authorization and have since increased our authorization in 2023, bringing our repurchase capacity to $200 million.

With our leverage rate sales well below 4 time, the anticipated free cash flow generation of the business and the attractive valuation of our stock, we believe repurchasing shares is a very compelling use of capital and intend to use our discretionary capital available to repurchase shares going forward, depending, of course, on market conditions. We’ll also continue to invest in our business to deliver value to both our guests and shareholders, but the bar is high for new projects on a risk-adjusted basis given the valuation of our stock. Turning to our MICE Group business. Our 2023 net MICE Group business on the books is approximately $50 million versus $40 million at the time of our last earnings call and is well ahead of our final full year 2019 MICE revenue of $32 million.

The vast majority of the MICE business on the books for 2023 is scheduled to stay with us during the first half of the year as compared to roughly two-thirds of 2022’s MICE business being first half weighted. A significant portion of the MICE business realized during the second half of 2022 was shorter lead time business compared to typical MICE bookings during the high season. Our sales funnel and pacing for the second half remain healthy. Now moving on to the fundamentals. Excluding the impact from Hurricane Fiona on our DR segment, our fourth quarter results exceeded our expectations as a result of better-than-expected ADR, occupancy and less inflationary pressure on F&B and utilities. With respect to top-line, occupancy came in above our expectations, driven by close-in demand in the Yucatan and Jamaica.

Also came — ADR also came in above our expectations due to better-than-anticipated ADR gains in the Dominican Republic at both our managed properties following their reopening post Hurricane Fiona. On the cost front, as Bruce mentioned, the teams have done an excellent job navigating the current challenges of the environment. Our resort margins were well ahead of Q4 ’18, ’19 and ’21 levels. And as I mentioned on our last earnings call, we began to see stabilization in F&B and utilities costs on a per unit basis around the middle of 2022, and we’re hopeful that the inflationary pressure from these two areas would begin to ease as we move into 2023 and lap the surge that occurred around the start of ’22. We began a few signs of this during the fourth quarter, driving a significant portion of the upside to own resort EBITDA outside of the DR.

Although it’s nice to see some cost relief, these expenses can be volatile quarter-to-quarter. I’d also like to point out that we’re forecasting our insurance premiums to increase substantially in 2023 during our April renewal, and this line may pressure second half margins. This expectation is not only due to our own claims related to Hurricane Fiona, but several incidents that plagued the insurance industry in 2022. At the segment level, as Bruce mentioned, we experienced broad-based strength in Q4, excluding the impact of Hurricane Fiona. Jamaica made more headway on closing the gap versus other segments with underlying growth versus Q4 2019, just shy of the Yucatan segment. Adjusting ADRs in Jamaica for the mix impact associated with asset sales, like-for-like ADRs in Jamaica are still lagging comparable peers by roughly 10 to 15 percentage points.

As a reminder, Jamaica got off to a slower start in the beginning of 2022 due to the Omnicron variant having a disproportionate impact on the segment given its COVID testing requirements at the time. On the margin front, Jamaica reopened fourth quarter — reported record fourth quarter owned resort EBITDA margins driven by accelerating ADR growth and better-than-expected F&B and utilities expense. Keep in mind when comparing results in Jamaica for the other segments that Jamaica generally has higher operating costs in our other segments and typically experiences higher ADRs as well. Now looking at other segments, the Yucatan Peninsula continued to deliver strong results with sequential occupancy improvements to a post-pandemic high of 81% and reported ADR gains of nearly 72% versus Q4 ’19 or 49% underlying ADR growth when adjusted for OTA commission changes and mix impact from asset dispositions.

On a year-over-year basis, the Yucatan segment ADR increased roughly 11% on an underlying basis adjusted for OTA commission changes. These non-cash commission changes also weighed on year-over-year segment margins by roughly 25 basis points as were required to gross up both the revenue and expense under U.S. GAAP, which should have a diminishing impact on reported results as we continue to lap the implementation of the change and the recovery of the OTA channel mix. F&B costs were again significantly better than expected in Yucatan, while utilities expense was comparable to last year. However, based on current spot rates for utilities, utilities should see year-over-year improvement in the first half of ’23. Margins were also negatively impacted by roughly 30 basis points to 50 basis points due to the timing of uneven expenses such as brand related fees and sales and markets.

The Pacific Coast had another fantastic quarter with underlying ADR gains of approximately 80% versus 2019 or 24% year-over-year, leading to robust margin performance, as again, F&B and utilities expenses were less of a headwind year-over-year. Adjusting for the change in OTA commission accounting, ADR grew just under 26% year-over-year in the fourth quarter. In the Dominican Republic, we reopened our Hilton and Hyatt properties a bit ahead of schedule just in time for the high season. The performance out of the gate was quite strong, helping our Q4 results. As Bruce mentioned, we are fortunate that we experienced very little demand disruption on the bookings front at those properties for 2023. We experienced approximately $13 million of disruption related to Hurricane Fiona in the fourth quarter, in line with our expectation of $13 million to $15 million impact before business interruption proceeds.

One item to note, due to the adjustments that affect VAT rates in the DR, we recorded an adjustment in the fourth quarter of 2022 to true up non-income-based and taxes for the full year. This positively impacted Q4 reported ADR in the DR by just over $20 and total company Q4 reported ADR by approximately $6. Total owned resort EBITDA margins were favorably impacted by roughly 80 basis points as a result of the adjustment. Now turning our attention to our 2023 outlook. We expect our full year adjusted EBITDA of approximately $260 million to $280 million, representing year-over-year growth of low double digits at the midpoint, and this is driven by double-digit RevPAR growth for the year. For the first quarter of 2023, we expect owned resort EBITDA to be between $98 million and $103 million, and that is inclusive of a $10 million year-over-year drag in EBITDA from the transition of the two Jewel properties in the Dominican Republic.

To be clear, I’m referring to $98 million to $103 million of owned resort EBITDA before corporate expense of roughly $13 million to $14 million and includes fee income of roughly $2 billion to $3 billion. We expect our reported occupancy levels, inclusive of the two DR jewels to be in the low 70%-s, reflecting the rooms out of service in the DR due to the closure of one of our dual properties. Occupancy at our other legacy-owned resorts is anticipated to be nearly 10 percentage points higher during the first quarter. With respect to Q1 ADR, we expect approximately 20% year-over-year ADR growth on a reported basis. And given our booking window, we’re roughly 90% to 95% booked for the first quarter. Looking ahead to the second quarter, we expect reported occupancy in the low to mid-70%-s, down slightly year-over-year, which again includes the mid-single-digit drag from the two Jewel properties in the DR.

We expect Q2 ADR to grow high-single digits to low-double digits on a year-over-year basis, and owned resort EBITDA margins to expand year-over-year despite a $5 million year-over-year EBITDA drag in the DR from the two Jewel properties. Given our booking window, we were roughly 50% booked for the second quarter at this time. For the second half of 2023, we expect reported occupancy in the mid-70%s and year-over-year ADR growth to be up mid-single digits on a reported basis. We anticipate owned resort EBITDA margins to be flat up on a year-over-year basis in the second half, and the two Jewels properties in the DR to be a year-over-year tailwind to EBITDA in the fourth quarter, and nearly neutral on the third quarter. As we said before, commodities and insurance are wildcards as we head into the second half and are key considerations when contemplating our full year guidance.

Given the number of moving parts to consider for Playa, I think it would be best to frame our guidance as such. For the legacy core and owned managed portfolio, which again excludes the two Jewel properties in the DR, we expect low double-digit ADR growth for the first half of the year and mid-single-digit year-over-year growth in the back half. Occupancy levels for this core portfolio in the high 70%-s in the first half and mid-70%-s in the second half. And owned resort EBITDA margin expansion given the aforementioned ADR gains and easing inflationary pressures. As for the Jewel Punta Cana and Jewel Palm Beach, we expect them to ramp from mid-teens occupancy in the first quarter to approximately 50% in the second quarter, which would get them near breakeven on an EBITDA basis near the end of the second quarter following EBITDA loss in the first quarter.

We expect these two properties to be stabilized on an occupancy and EBITDA dollars contribution basis in the second half of the year. However, as Bruce mentioned earlier, we’re actively working to sell these resorts. So, to recap, following the — the following are the key inputs to consider as you think about our 2023 outlook. As I and Bruce mentioned, we’re currently pacing year-over-year ADR gains of 10% or more for the first half of the year. We’ll be lapping Omicron during the first quarter, which impacted our Q1 2022 occupancy levels and ADR; thus, ADR growth will be likely higher in Q1 than Q2, even after adjusting for typical seasonality. We expect full year occupancy to be slightly higher than 2022, adjusting for extraneous factors.

We anticipate a better inflation rate in our cost basket as compared to what we experienced during 2022, although it will likely remain elevated. We have good visibility on our labor costs, and see the wage increases slightly higher than what we experienced in 2022, but are experiencing lower cost inflation on food and beverage and utilities during the first quarter of ’23. And while we hope the lower prices persist, these categories can again be quite volatile. Our resorts are fully staffed, and we have good visibility on wages and related growth. We hope that framework helps guide you as you fine-tune your models and give you further insight to what we’re seeing and expecting. But now I’ll turn it back over to Bruce for some concluding remarks.

Bruce Wardinski: Great. Thanks, Ryan. So, in summary, I have just a couple of comments. First, our results speak for themselves. Second, I read a market quote this morning that I found really interesting. It said, “Big tech is out, and the old economy is in on Wall Street.” There’s almost no business older than lodging. We’ve been around since the beginning of mankind. The reason why this quote resonates with me and on Playa is that while our business prospects looked really good before the pandemic, the pandemic has changed everything. People don’t want to spend all day on their computer screens. They’re looking to experience life, and that’s for all ages. Their ability to travel and work remotely while doing it has allowed a lot of flexibility.

They can spend time with people and they can live their lives to the fullest. In my mind, this is what Playa offers to our guests at a great price value proposition, and I think that’s why our business is doing well. With that, I’ll open up the line for any questions.

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Q&A Session

Operator: At this time, we will begin the question-and-answer session. And our first question today comes from Patrick Scholes from Truist Securities. Please go ahead with your question.

Patrick Scholes: Hi, good morning, everyone.

Bruce Wardinski: Good morning.

Ryan Hymel: Good morning.

Patrick Scholes: Lots of color there on quarterly expectations and margins, et cetera. But could you give some more specifics on, at least granular percentage-wise on overall for the year, wage growth — wage and benefit growth expectations as well as overall operating cost growth including utilities and insurance? Thank you.

Ryan Hymel: On the wage side, it’s likely high single digits just kind of blended across the board. We’ve got a number of different buckets of wage costs within our properties, right? You’ve kind of got the executive team that’s kind of on its own kind of salary scale and things like that. And then, you’ve got line staff that are governed more by minimum wage increases from the government. And then you’ve got union employees, which we negotiate with on an annual basis. But call it blended on the labor front, kind of high single-digit percentage. As I mentioned earlier, I don’t expect our F&B to move too materially from what it’s been over the last quarter, particularly given some of the investments we’ve made in that arena, adding some staffing on food and beverage as well as purchasing, which is beginning to start paying some dividends from a cost recovery perspective and purchasing power as we’ve grown.

And then, on insurance, honestly, it’s pretty difficult. The Hurricane Ian was the third worst storm in history and total global insured property losses in 2022 was well over $130 billion. So, without our claim, we were expecting a difficult year. So, kind of built into our kind of guidance range is significant, call it, 50% increase in our premium right now. But it’s still — that’s still a wildcard at this point. We’ll have better information on our next call.

Patrick Scholes: Okay. Thank you. And then, a follow-up question. You talked about the Asian customer being — visitation being significantly down. I think you said roughly 75%. Historically, pre-COVID, what did that customer segment represent as a percentage of your business?

Ryan Hymel: Around 4%.

Patrick Scholes: Okay. So, 4%, down 75%…

Ryan Hymel: Yes. So small. Primarily at our highest.

Patrick Scholes: Okay. A little opportunity for that. Okay. Thank you. I’m all set.

Ryan Hymel: Thank you, Patrick.

Bruce Wardinski: Thanks.

Operator: And our next question comes from Dany Asad from Bank of America. Please go ahead with your question.

Dany Asad: Hi. Good morning, everybody. Question on — is on rate. So, like at a high level, how do you guys think about lapping really strong rates in — especially in your most recovered markets, specifically anything about like Cancun? And then again, strategically, how do you balance this — how do you kind of balance ADR growth without possibly hurting Net Promoter Scores down the line as you kind of push rate more and more and more in your markets?

Ryan Hymel: Yes. That’s the important question is the basis for our thesis coming out of the pandemic, and Bruce said his credit has had us focus on ADR gains while providing exceptional service. And so, Bruce touched on it earlier, our NPS scores, both internally and at the brands are some of the highest ever. Bruce can chime in on that in a minute. But more importantly, it’s something we try and hammer home every single time, whether it’s on these calls, externally or more importantly, internally. When you look at — yes, you look at some of these percentage gains over pre-pandemic and they look large. But one, first and foremost, when you adjust for asset sales, you take out the impact of Cap Cana, and you take out the adjustments from accounting from a gross up from commissions, those underlying percentage gains while still strong aren’t ridiculous.