Wyndham Hotels & Resorts, Inc. (NYSE:WH) Q4 2022 Earnings Call Transcript

Wyndham Hotels & Resorts, Inc. (NYSE:WH) Q4 2022 Earnings Call Transcript February 16, 2023

Operator: Good day, and welcome to the Wyndham Hotels & Resorts Fourth Quarter and Full Year 2022 Earnings Conference Call. . I would now like to turn the call over to Matt Capuzzi, Senior Vice President of Investor Relations. Please go ahead.

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. These risk factors are discussed in detail in our most recent annual report on Form 10-K filed with the Series and Exchange Commission and any subsequent reports filed with the SEC. We will also be referring to a number of non-GAAP measures. Corresponding GAAP measures and a reconciliation of non-GAAP measures to GAAP metrics are provided in our earnings release, which is available on our Investor Relations website at investor.wyndhamhotels.com.

We are providing certain measures discussing future impact on a non-GAAP SEC only because without unreasonable efforts, we are unable to provide the comparable GAAP metric. In addition, last evening, we posted an investor presentation containing supplemental information on our Investor Relations website. We may continue to provide supplemental information on our website in the future. Accordingly, we encourage investors to monitor our website in addition to our press releases, filings submitted with the SEC and any public conference calls or webcast. With that, I will turn the call over to Geoff.

Geoffrey Ballotti: Thanks, Matt, and thanks, everyone, for joining us this morning. We’re thrilled to report that our Q4 results finished stronger than our expectations with full year reported global RevPAR growth of over 16%; net room growth of 4%; and adjusted EBITDA of $650 million. We generated $360 million of free cash flow in 2022 and returned over $560 million to our shareholders, which represented 7% of our market cap. By all accounts, it was an outstanding year for Wyndham Hotels and Resorts. We grew net rooms by 4%, including 80 basis points of growth from the acquisition of our 23rd brand, Vienna House by Wyndham. Excluding Vienna House, we opened 64,000 rooms for the year, more than 1 hotel each and every day. This represents 20% more rooms than we added last year.

Here in the United States, we added 27,000 rooms with some great new hotels, like the Stone Hill Lawrence, a AAA 3 diamond hotel outside of Kansas City, who converted to our Trademark Collection brand and the opening of our first two construction, La Quinta Hawthorn Suite hotels in Texas, a combined extended stay and select-service hotel in a mid-scale space designed to streamline development and operational costs by utilizing a share lobby, fitness center, meeting rooms, bar and other amenities. Internationally, we opened 37% more rooms organically in 2022 than we did last year and 2% more than we did back in 2019. Latin America led the way with 14 luxury resort additions to our Registry Collection brand across the Caribbean and Mexico. And in the fourth quarter, our Latin America team welcomed our first Wyndham Grand in Mexico with the opening of the Beach Front, Wyndham Grand Cancun Resort centrally located in Cancun Hotel zone.

Our EMEA region also had a tremendous year, opening 57% more rooms organically than they did last year or 6% higher than 2019 with impressive fourth quarter additions like the Bulk and Jewel resort, a trademark collection conversion in the resort town of Razlock near Sofia, Bulgaria, and the Ramada Riyadh King Fahd, the first new Ramada addition since buying back our master license agreement in Saudi Arabia. In Southeast Asia, we grew net rooms by 5%, open 40% more rooms in 2022 than we did in 2021. And after many years of development, we welcomed the beautiful new 949 room Wyndham Benin Golden Bay Resort directly on the beach in this former French Colonial port, marking the 14th hotel opening for our Asia Pacific development team in Vietnam.

And finally, our China direct development team grew net rooms by another impressive 10%. And despite the sporadic lockdowns and travel restraints, many of our team members continue to face throughout the fourth quarter, which have now thankfully dissipated. The team added more direct franchise rooms than they did in the fourth quarter of 2019. And nearly twice as many rooms than they did in the fourth quarter of last year. With the opening of hotels, like the Wyndham, the Wyndham Grand and the La Quinta Shanxi, three beautiful new hotels located in the business district in the heart of Shanxi province featuring quite a direct access to Shanxi’s International Convention and Expo Center. And this new La Quinta Shanxi represents our second new construction La Quinta to open in China in 2022.

On the retention front, we improved for the second consecutive year to a record high global rate of 95.3%, including the first time that our international retention rate has exceeded 95%, an indication of our ever-improving owner-first value proposition. We grew our development pipeline sequentially by 3% and by 12% versus prior year to a record 219,000 rooms and 1,700 hotels. This marks Wyndham’s tenth consecutive quarter of sequential pipeline growth. Our teams awarded 882 contracts globally for over 113,000 room additions, which is over 3 new contracts awarded each and every business day. The number of domestic contracts signed in the fourth quarter was 40% higher than what we awarded last year and nearly 90% higher than what we awarded in the fourth quarter of 2019, reflecting record developer interest in our brands for the full year.

We signed 563 contracts in the U.S. for 62,000 room additions, which is nearly double the amount signed in 2019 and 65% more than last year. Fourth quarter new construction domestic executions increased 95%. Notably, we awarded another 50 Echo Suites by Wyndham contracts this quarter to establish developers and experienced extended stay operators, bringing the total number of contracts awarded to 170 hotels in just 9 short months since launching the brand last March and making Echo the hotel industry’s fastest-growing new brand launch of 2022. We broke ground on our first 3 ECHO hotels in the last few months of 2022, and we expect to open our first ECHO Suites by Wyndham Hotels later this year as we break ground on another 2 dozen ECHO hotels in 2023.

On a full year basis, new construction domestic executions increased 130% year-over-year. While domestic conversion execution increased 30% compared to 2021. Developers are selecting by Wyndham new construction offerings now more than they ever have. Our economy new construction brand, Microtel, added 2,200 rooms to its domestic pipeline in 2022, driven by developer interest in its cost-efficient motor prototype. While upper mid-scale brands like Wyndham Garden added 1,300 rooms to its domestic new construction pipeline. In the upscale segment, we saw continued strong new construction demand for brands like Wyndham, which grew its U.S. pipeline by 1,700 rooms this year. Consumer demand remains strong. Our middle-class customers continue to spend more on travel than they ever have, and they are staying longer than they were back in 2019, given hybrid work environments.

We saw booking windows increase 18% versus prior year to over 14 days with guests planning further ahead given space constraints and the fear of being blocked out as so many were last spring and summer. Thursday and Sunday night occupancies and our guest average length of stays have both continued to climb in the fourth quarter versus where they were back in 2019. All of these trends are giving our franchisees the confidence to continue to yield up in their pricing with the new revenue management tools we’re providing to them, combined with the constant messaging that real ADR for the select-service space remains essentially flat to where it was 4 years ago. We believe that leisure travel remain the #1 priority for the discretionary consumer spend among middle-income Americans in 2023 as so many recent consumer surveys from our organizations such as MNG Wall at the same time, we’ve seen strong growth in our infrastructure-related revenues, which makes up about 20% of our U.S. royalties.

This area has always been a strength for Wyndham. And with the size of the pies that they grow substantially as the government begins to $1.5 trillion in infrastructure and CHIPS Act spending, we’ve been making further investments here to grow our share. Those investments have already begun paying off with domestic weekday occupancy in our economy hotels at their highest absolute levels on record. Our general infrastructure related revenues increased double digits in the fourth quarter versus 2019, a trend that began back in the second quarter of 2021. And we’re confident that it will continue to strengthen throughout 2023, as projects for new roads, bridges, rail, water systems, airports, broadband and public transfer begin. Funneling the hundreds of billions of dollars to the states is a heavy lift that will take time and require coordination from agencies on both the federal and the state levels as these projects commence over the next several years in the markets where our economy and mid-scale small business owners will benefit.

We estimate that this new level of spend represents an opportunity for us to generate over $3.3 billion of incremental revenue for our franchisees and over $150 million of incremental royalties for Wyndham over the spend period. Our award-winning Wyndham Rewards loyalty program recognized as the best hotel loyalty program for the fifth consecutive year by the readers of USA Today, grew its enrollment by 8% over the past 12 months and now stands at 99 million members. Wyndham Rewards helped drive a 23% increase in direct bookings to our brand.com sites, outpacing the rate of growth across all third-party channels and, once again, representing a record high level of contribution for our brand.com sites. Our core values and our connie service culture are at the heart of what drives our growth and what makes Wyndham such a great place to work.

There’s no better measure of why we are such a great place to work that our most recent team member engagement survey, which generated record high results. And it was no surprise to see Wyndham Hotels & Resorts qualify as a constituent of the 2022 Dow Jones Sustainability Index, a global index consisting of the top 10% of the largest 2,500 companies in the S&P Global Broad Market Index based on sustainability and environmental practices. We sincerely thank our valued team members without whose support, none of this would be possible. And with that, I’ll turn the call over to our CFO, Michele Allen. Michele?

Michele Allen: Thanks, Geoff, and good morning, everyone. I’ll begin my remarks today with a detailed review of our fourth quarter and full year results. I’ll then review our cash flows and balance sheet, followed by our 2023 outlook. We generated $310 million of fee-related and other revenues and $126 million of adjusted EBITDA in the fourth quarter, bringing our full year fee-related and other revenues to $1.35 billion and adjusted EBITDA to $650 million, both above our expectations. Our franchising segment grew fourth quarter revenue by 12% year-over-year, primarily reflecting global RevPAR growth and higher license fees. Adjusted EBITDA increased 8% to $138 million, as the revenue increases were partially offset as expected by the timing of higher marketing spend in the quarter, which unfavorably impacted margin by 200 basis points.

Excluding this timing impact, our adjusted EBITDA grew 13% in the fourth quarter, and our adjusted EBITDA margin remained consistent with prior year. In our Hotel Management segment, fourth quarter revenue and adjusted EBITDA declined, reflected the sale of our select-service management and owned hotel businesses, which collectively contributed approximately $38 million in fee-related and other revenue and $12 million in adjusted EBITDA in 2021. Within our Corporate and Other segment, our fourth quarter expenses were in line with expectations or relatively flat compared to 2021. Fourth quarter adjusted diluted EPS was $0.72, a 4% increase year-over-year or approximately 16% on a comparable basis. This increase reflects adjusted EBITDA growth in our Hotel Franchising segment,as well as a benefit from our share repurchase activity.

Now turning to full year results. Our franchising segment grew revenue by 16% year-over-year, primarily reflecting global RevPAR growth and higher license fees. Adjusted EBITDA increased 15% to $679 million and our adjusted EBITDA margin was consistent with 2021 despite ongoing inflationary pressures. In our Hotel Management segment, full year revenue and adjusted EBIT declines reflected the first half of 2022 exit of our select-service management and owned hotel businesses, which contributed fee-related and other revenue of $50 million during 2022 and $125 million in 2021 and adjusted EBITDA of $18 million during 2022 and $37 million in 2021. Within our Corporate and Other segment, we saw $7 million of higher expenses due to inflationary cost pressures, in line with expectations.

Full year adjusted diluted EPS was $3.96, a 25% increase or approximately 29% on a comparable basis. This increase reflects adjusted EBITDA growth in our Hotel Franchising segment, lower net interest expense and a benefit from our share repurchase activity. Before moving on to free cash flow, let me take a moment to discuss current regional RevPAR performance. Global RevPAR in constant currency grew 15% year-over-year in the fourth quarter, up from 12% in the third quarter. Domestically, RevPAR finished 12% ahead of 2021 and 9% ahead of 2019. U.S. RevPAR growth accelerated to 480 basis points in the fourth quarter from 250 basis points in the third quarter. And for the first 6 weeks of 2023, RevPAR for our brand has continued to accelerate with the U.S. up approximately 600 basis points year-over-year.

Internationally, fourth quarter constant currency RevPAR ran 46% ahead of last year and 23% above 2019. All regions, with the exception of Asia Pacific, generated RevPAR well in excess of both 2019 and 2021 levels. Full year international occupancy finished down 21% to 2019 and will continue to provide a meaningful tailwind for us in the coming quarters as demand continues to grow overseas, especially in our Asia Pacific and EMEA regions, which, for the whole of 2022, were only 68% and 88%, respectively, of 2019 levels. Now turning to free cash flow. We generated $360 million in 2022 compared to $389 million in 2021, reflecting, as expected, lower cash collected from 2020 COVID-related fee deferrals as well as higher development advances. Importantly, we converted 55% of our adjusted EBITDA to free cash flow, right in line with our target.

We successfully executed on our stated capital allocation strategy by investing over $120 million to grow the business while returning a record high $561 million to our shareholders, representing 7% of our market cap through $445 million of share repurchases and $116 million of common stock dividends. As we move into 2023, our capital allocation strategy remains unchanged. We will remain disciplined on the core tenets of our M&A strategy and pursue transactions that are accretive from an earnings and net room growth perspective, and complementary to our existing brand portfolio. We will also continue to incentivize franchisees to invest in new brand prototype designs to improve overall brand equity. And based on the success of our new ECHO Suites extended stay brand to date, we expect to begin to deploy a portion of the $100 million of development capital we earmarked as the first ECHO Suite hotels near opening in late 2023.

Finally, we expect to maintain our industry-leading dividend payout ratio subject to Board approval and share repurchases will continue to be an integral element of our capital allocation strategy, albeit lower than 2022, given the absence of the onetime proceeds from last year’s transaction. We ended the quarter with approximately $900 million of total liquidity, and our net leverage ratio was 2.9x, just below the low end of our stated range. Moving on to outlook. For full year 2023, we expect global net room growth of 2% to 4% and global RevPAR growth of 4% to 6%, which translates to 6% to 8% above 2019 levels, a data point that we still consider to be relevant since the select-service space, which represents over 90% of our U.S. portfolio, recovered to pre-COVID levels much faster than the industry’s full service base.

Fee related and other revenues are expected to be $1.38 billion to $1.41 billion. We are projecting adjusted EBITDA of $650 million to $660 million, which reflects comparable basis growth of approximately 5% when neutralizing for the variability in the marketing funds year-over-year, which will contribute approximately $10 million less adjusted EBITDA in 2023 as we expect to completely recapture our 2020 investment. Adjusted net income is projected to be $337 million to $349 million and adjusted diluted EPS is projected at $3.84 to $3.98 based on a diluted share count of $87.7 million, which excludes any potential share repurchases. Finally, we are expecting free cash flow conversion from adjusted EBITDA of 50% to 55%, which reflects the impact from our expected increase in development advancement from $48 million in 2022 to approximately $60 million in 2023 as well as higher interest expense.

As a reminder, we have provided two slides in our investor presentation to help with your modeling. Slide 40 provides the historical financial impact of our select service management business and owned hotels, which will need to be adjusted from your base. And Slide 41 provides revenue sensitivity. In closing, we are very pleased with our 2022 performance. We successfully executed on our key business objectives, growing our system, increasing our owners’ profitability and simplifying our business model, while generating significant adjusted EBITDA and free cash flow and returning a record amount of capital to our shareholders. We enter 2023 with a strong balance sheet, a record pipeline, tremendous momentum behind our new extended stay brand, ECHO Suites by Wyndham and a great deal of optimism surrounding the largest infrastructure bill in our nation’s history.

With that, Geoff and I would be happy to take your questions. Operator?

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Q&A Session

Operator: . Our first question comes from Joe Greff with JPMorgan.

Joseph Greff: Geoff, can you talk about the environment for, I guess, what we characterize as tuck-in acquisitions. How much is out there? Is there anything warm that you’re working on? How competitive is the environment today for tuck-in acquisitions versus a year or 2 years ago? And I have a follow-up.

Geoffrey Ballotti: I think the environment will continue and improve, joe. Vienna House is a good example of that, our latest tuck-in acquisition. And I think when you look at — domestically and internationally, it will continue to pickup and deals will continue to present themselves. And we’ll be strategic. We’ll be methodical and evaluating the deals as they come along. We’re going to be looking for brands that are both EPS and NRG accretive as Vienna House was the brands that are of high quality and brands with high ROI potential. Four of the last 5 brand launches, though, for us, Trademark, Ultra, Registry and ECHO have all been launched organically. And there’s no reason we can’t continue to do that, but we now have great brands in every segment of the industry.

But better than anyone that M&A is always in our DNA, having covered us for as long as you have with 19 of the 24 brands we have, have been acquired, and we do believe that size matters, scale matters. And we’ll continue to look for deals. But we’re not going to do a deal just to do a deal. We remain disciplined and ensure that any deal that we do in the next year or 2 to have compelling returns for our shareholders as Vienna House had.

Joseph Greff: And then switching over to ECHO and nice to see the sequential growth to continue here. And I heard both Geoff, your comments and Michele, your comments, it doesn’t sound to us that your 2% to 4% 2023 systemwide rooms growth incorporates much from ECHO, is that more of a 2024 contributor? And then is there any pivot, Geoff, on multi-development ECHO deals as yet to single?

Geoffrey Ballotti: Questions you’ve asked before offline. Yes, there is a pivot. We have not yet offered ECHO to the thousands of individual franchisees, which we expect to do later this year. And to your direct question, there is no impact really much impacted to 2023 net room growth. We will have our first ECHO openings later this year. We have broken ground and just some phenomenal RevPAR markets: Plano, Texas; Sterling, Virginia; Richmond, Virginia. And the team is unbelievably excited. I mean we said on the Q2 call that we have 100 in the pipeline. We’re at 170. And those are, as you say, all with multiunit development agreements with some of the nation’s most successful extended stay developers because we want to really open these — develop these, builds these and open these to have as big an impact as we can.

Operator: Our next question comes from Stephen Grambling with Morgan Stanley.