Hyatt Hotels Corporation
Q4 2021 Earnings Call Transcript

Published: 17 Feb 2022

[Operator:]

Good morning and welcome to the Hyatt Fourth Quarter and Full Year 2021 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question-and-answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Noah Hoppe, Senior Vice President, Investor Relations. Thank you. Please go ahead.

[Noah Hoppe:]

Thank you, Rob. Good morning, everyone and thank you for joining us for Hyatt's fourth quarter and full year 2021 earnings conference call. Joining me on today's call are Mark Hoplamazian, Hyatt's President and Chief Executive Officer; and Bottarini, Hyatt's Chief Financial Officer. Before we get started, I'd like to remind everyone that our comments today will include forward-looking statements under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our annual report on Form 10-K, quarterly reports on Form 10-Q and other SEC filings. These risks could cause our actual results to differ materially from those expressed in or implied by our comments. Forward-looking statements in the earnings release that we issued yesterday, along with the comments on this call, are made only as of today and will not be updated as actual events unfold. In addition, you can find a reconciliation of non-GAAP financial measures referred to in today's remarks on our website at hyatt.com under the Financial Reporting section of our Investor Relations link and in yesterday's earnings release. Lastly, you'll note that we've provided a slide presentation on our Investor Relations website and on our Form 8-K filed yesterday that will supplement our discussion today. We will reference certain slides during our remarks. Today's remarks will provide details on new disclosures as this is the first quarter we're reporting Apple Leisure Group results as part of Hyatt. As always, we will provide as much time as possible for Q&A and will be available after the call for follow-up questions. An archive of this call will be available on our website for 90 days. And with that, I'll turn the call over to Mark.

[Mark Hoplamazian:]

Thanks, Noah. Good morning, everybody and thank you for joining us for -- today for our 2021 fourth quarter and full year earnings conference call. I'd like to begin today by expressing my deepest gratitude to every member of the Hyatt family. The last two years have been the most challenging this industry has ever faced, beginning with an unprecedented level of disruption in 2020, followed by a rapid but very uneven recovery in 2021. We've successfully adapted to this dynamic environment by getting closer to our best customers and World of Hyatt members even as we quickly adapted and discovered new sources of demand, all while maintaining an unrelenting focus on our purpose

[Joan Bottarini:]

Thanks, Mark and good morning, everyone. My commentary today will cover consolidated financial results, key drivers of performance and overview on ALG and expectations I can share for 2022. Before I go through the results, I want to remind everyone that Hyatt's fourth and full year 2021 financial results include two months of ALG performance. Late yesterday, we reported a fourth quarter net loss attributable to Hyatt of $29 million and a diluted earnings per share loss of $0.26. On an enterprise basis, we assess Hyatt's financial performance on the sum of three items

[Noah Hoppe:]

Before we take your questions, we would like to take a moment to address some of the follow-up questions we have already received, including those related to the accounting considerations for the UVC business that is part of the ALG segment. Mark, over to you.

[Mark Hoplamazian:]

Thanks, Noah. Look, first and foremost, I just want to say that we are thrilled with the performance in the quarter but also what we're seeing in the -- what I will now describe as a growing period, what we can call post-Omicron booking levels. It's giving us tremendous optimism as we look into this year. So our core legacy Hyatt business is clicking on all cylinders. The margins that Joan talked about and our overall financial results are very, very strong and we've been able to continue to grow or perform at a relative advantage to our principal competitors. Secondly, I think Joan perfectly laid out the key unique attributes of ALG

[Joan Bottarini:]

Thanks, Mark. Yes. I just wanted to expand a little bit -- take a moment to expand a little bit on the accounting and the disclosures. The membership club, it's similar to other subscription models that you might be familiar with where a fee is paid to gain access to a benefit. And in this case, the access is being provided by the Americas AMR resort. And while the accounting for the club is somewhat similar to the timeshare business in the lodging industry, I want to be very clear that the club is not a timeshare business. There's virtually no capital required from Hyatt and no points are purchased. It is a fee-based membership club paid by members and entitles them to access benefits that are accrued as fees are paid over time. In our industry, the timeshare comparison is helpful for those of you that cover timeshare but it's a fundamentally different model. And we further explained the accounting and the connection between cash as a very important measure that relates to the combination of these three items that we report and the difference in GAAP accounting which is where the expenses -- and I've described this in my prepared remarks, where the expenses are front-loaded and revenue is recorded and recognized over time. So again, this is on Pages 22 to 25 of the supplemental presentation. We provided more information there. So with that, I'll turn it over to Rob to take our questions for Q&A.

[Operator:]

And your first question comes from the line of Stephen Grambling from Goldman Sachs. Your line is open.

[Stephen Grambling:]

Hi, good morning. Thanks for all the accounting color which I guess can be summed up as following the cash. As we think about the $174 million in economic EBITDA at ALG this year, could you help frame the EBITDA contribution between the two kind of major segments, where the outperformance versus your underwriting has been most pronounced? And then also, as we think about that strong forward-looking trends that you cited for 2022, how does that typically flow through to EBITDA and free cash flow for this segment?

[Mark Hoplamazian:]

So Stephen, thank you very much for the question. If you've got the deck that we posted, candidly, there's a first half, second half comparison on Page 15. That's probably a good place to start in terms of what the composition of the amounts are but you're asking a slightly different question with respect to where it came from across the various business lines. So we described -- as Joan described, we've got two business lines within ALG. One is AMR and you can see that accounts -- accounted for roughly 70% of the total; and the Vacations business which accounts for roughly 30% of the total. The total amount of, to use your terminology, economic EBITDA for the second half is that -- it was $125 million of total economic EBITDA for the second half. Let me just say that, I mentioned it in my script, the AMR performance, the hotel performance -- and actually, all three parts of the business performed far in excess of what we had underwritten because the acceleration of leisure demand and then the opening up of Europe which led to an extended season in Europe and some of the longer-term work that has been done on the technology platform and the operating metrics -- or operating practices within Vacations all came together this past year. And we're running significantly ahead of our underwriting. And so we're thrilled about that. We see momentum continuing into this coming year. And by the way, because I want to present a balanced picture, part of the reason why the second half of last year was such a pronounced result is because, frankly, Americans couldn't go to Europe for holiday. So a lot of them chose to go to the Caribbean and Mexico. By the way, that means a lot more of them discovered our resorts and that's reflected in the UVC membership increase which was really significant. And the second thing that's true is that the cruise lines were not operating. So yes, we will see more European travel this summer than we did last. And yes, at some point, sailings will begin again. But I really feel strongly that the exposure to a bigger guest base, especially to Hyatt's legacy guest base, is going to really continue to drive demand. And we're seeing booking levels that are just remarkable. So that's the story line. With respect to the translation of EBITDA into cash, the answer is it's extremely high. There's really all of the working capital changes which we will have on a seasonal basis for the Vacations business. There's really no material change in -- there's a very stable net working capital picture for AMR and UVC. And the translation of economic earnings -- economic EBITDA, to use your terminology, into cash is very high. So, we currently stated that the company -- ALG generated $40 million of cash. And we told you that our assessment of the economic result is $31 million. That $10 million -- $9 million difference there has to do with some timing issues and a little bit of working capital. But overall, over time, those two numbers will track very, very closely to one another. We've looked at that and we're confident that that's the case which is why we feel so strongly that it's a good representation of the actual economic performance and a good proxy for cash flow.

[Stephen Grambling:]

That's all very helpful. Maybe one unrelated follow-up. Given the tripling of the World of Hyatt members, I think you said 30 million and potentially even sharper growth going forward, how are you thinking about other forms of monetizing this cohort, whether through partnerships or a new kind of co-branded credit card program? Thanks.

[Mark Hoplamazian:]

Yes. First of all and I'm not -- I'm going to say this not being persnickety, I promise, Stephen, we don't think of monetizing our members. We think of caring for them. And I mean that in a sincere way in the sense that our belief is that we don't want to objectify our relationships with our most important members and guests. The UVC members and the World of Hyatt members are cherished by us because they have demonstrated their loyalty by committing their pocketbooks. And what we're trying to do and what we've successfully done both with respect to the Two Roads acquisition and ALG is provided high-quality additional opportunities for them to travel in our system. We expect to see a significant growth in market share -- share of wallet, if you will, for both. And we're currently working on how we can utilize the World of Hyatt program to enhance the value proposition for the UVC members within the ALG network and enhance the World of Hyatt proposition for existing members by plugging into ALG's AMR Collection so -- because the quality of the properties is very high and we think that there's going to be growth in membership. The growth in membership which is 18 -- for UVC, it's been an 18% compounded level and these data -- over the past five years. These data are on Page 18 of the supplemental deck. And World of Hyatt has tripled, as we said. So we've got tremendous growth in member bases. And UVC -- a version of UVC is going to be developed for Europe. It doesn't exist in Europe at this time but World of Hyatt does. So we see a lot of network effect that we are going to be able to bring to bear and make this more of a global proposition as we move forward.

[Stephen Grambling:]

Thanks a lot. I'll get back in the queue.

[Mark Hoplamazian:]

Thank you.

[Operator:]

Your next question comes from the line of Patrick Scholes from Truist Securities. Your line is open.

[Patrick Scholes:]

Hey guys, good morning, everyone. A question regarding what seems to be a large step-up in SG&A. And I hope I got my numbers right here. Roughly going -- on the core legacy Hyatt business, going from roughly 250 to 300 or about a 20% step-up. Can you -- if I got that right, can you explain that large step-up? Thank you.

[Joan Bottarini:]

Sure, Patrick. I can unpack our SG&A guidance which in total, that I reported in my prepared remarks, was $460 million to $465 million expected for 2022. And as you pointed out, legacy Hyatt is estimated between $300 million to $305 million and includes onetime integration costs for ALG. So if you exclude those costs, you arrive at $275 million for legacy Hyatt which does include some investments for 2022 but remains 20% below our pre-COVID expense base, if you exclude inflation in that analysis. And we've previously communicated that we remain intensely focused on retaining savings on our pre-COVID expense base in the range of about 15%. So we're definitely on track with respect to our expectations for 2022. I'd just point out, too, the other element there is -- in the total is the expectations for ALG which is $160 million of the $460 million to $465 million total SG&A guidance. And we've made the decision -- extremely important to invest in the business. It's performing extremely well. It's growing rapidly and there's clearly significant momentum that we've described in our prepared remarks. So we are -- we will continue to make investments in that business as it continues to grow.

[Patrick Scholes:]

Okay. Just to follow...

[Joan Bottarini:]

Sure. Go ahead.

[Patrick Scholes:]

Sorry, continue. Go ahead.

[Joan Bottarini:]

Yes. I was just going to point out that some of the costs associated with ALG are related to the membership club program, as I described and they're paid back to owners. So the integrated nature of the platform is evidenced even here in the cost base that we manage to support our owners to drive more profit. Go ahead.

[Patrick Scholes:]

Okay. Could I ask you -- so a follow-up question. In the $460 million to $465 million adjusted SG&A guide, there are onetime nonrecurring costs in that number, correct, of approximately $25 million? Am I correct there?

[Joan Bottarini:]

25 to 30 -- yes, absolutely. $25 million to $30 million is our estimate for onetime integration costs for ALG.

[Patrick Scholes:]

Okay. Thank you for the clarity on that.

[Joan Bottarini:]

You're welcome.

[Operator:]

Your next question comes from the line of Thomas Allen from Morgan Stanley. Your line is open.

[Thomas Allen:]

Thank you. Stepping away from ALG for a second. Your own margins were really impressive at 25% in the fourth quarter. Can you just talk about kind of the drivers behind that? And then how should we think about modeling the owned and leased segment on a go-forward basis? Thanks.

[Joan Bottarini:]

Sure, Thomas. This is actually the second consecutive quarter that our margins on our owned and leased portfolio have exceeded 2019 levels on a comparable basis. And it's intense focus from our managers. Clearly, they're doing what they can to yield revenue on the top line, particularly rates and driving great flow-through in a difficult environment. Some of the improvements are temporary. Relative to mix of the earnings that we're generating, the revenue that we're generating, there's lower F&B mix relative to stabilized levels. So that's helping a bit. And the labor situation, we're still at about -- I think it's about 90% of target levels at the property. So that is helping but there's absolutely permanent improvements that we anticipate. We've guided before about 100 to 300 basis points on a stabilized basis. And we still feel really good about that estimate given what our managers have been able to achieve. We've talked about some of the items that are driving that between technology enhancements and just really intense focus on having the right people in the right place at the right time and focusing on productivity as we add back staffing to make sure that we're delivering the service that we need to and our guests expect.

[Mark Hoplamazian:]

And we're leveraging more digital investments that we made over the course of the pandemic which we did not slow down. We kept our foot on the gas pedal with respect to evolving our digital platform and that's also helping to yield more efficiencies. We frankly had better guest experience and a better colleague experience along the way.

[Thomas Allen:]

That's helpful. And then going back to ALG. Based on your commentary when you announced the deal, we generally thought that 2022 contribution will be somewhere between the 2019 of about $170 million and the stabilized of about $225 million for 2022. Given 2021 outperformed, should we expect you to kind of get closer to that stabilized number in 2022? Or how should we think about it? Thank you.

[Mark Hoplamazian:]

Yes. I mean look, the performance and the momentum has been remarkable. And the unit growth or the cumulative growth of growing the system is really taking hold. The ramp period for a lot of the ALG hotels was actually quite fast and part of that has to do with the integrated nature of having ALG Vacations. But also, UVC members are the first ones to book into new properties. So the network effect as you grow is you bring people who want to experience those new properties as part of the benefits that they have signed up for and paid fees for. And so there's a mutually beneficial virtuous circle of value that's being created here. So we get faster ramps, we've got booking momentum that is significant and we've got unit growth over the course of the year. So, I mentioned earlier we ended the year 50% ahead of our underwriting for '21. And I would just say to you that if the trends that we see in place right now continue, then we will achieve that low double-digit multiple that we talked about at the inception well before the end of 2023. And exactly when that comes, I can't comment on yet because we need to see how things evolve. I am counting on, by the way, Europe having a regular summer. Last year, Europe did not have a regular summer. It was largely compressed into about 2.5 months or 2 months really. So there are some assumptions built in. But my answer to you is yes, we are on track to deliver our targeted valuation multiple ahead of the end of 2023.

[Thomas Allen:]

'23 or '22, Mark? This year or next year? Sorry.

[Mark Hoplamazian:]

No, we initially said that by the end of '23, we would get to a low double-digit effective multiple paid. And I'm saying it could be well before the end of 2023. Whether it actualizes in full by December 31, 2022, I can't really say yet. But I can tell you that if the trend continues and the momentum continues, then we will.

[Joan Bottarini:]

You're really speaking of a 12-month annualized multiple.

[Mark Hoplamazian:]

12-month annualized, yes, of the -- of how we measure for the financial performance. Is that clear, Tom?

[Thomas Allen:]

Yes, make sense. You're trying to get ahead of your original expectations. Perfect. Thank you.

[Mark Hoplamazian:]

Well ahead. Yes, well ahead.

[Operator:]

Your next question comes from the line of Smedes Rose from Citigroup. Your line is open.

[Smedes Rose:]

Hi, thanks. I was just wondering if you have any updated thoughts on capital return at some point in 2022 just given, it sounds like, your cash flow profile is going to be significantly enhanced by this acquisition. So just any updated thoughts there?

[Mark Hoplamazian:]

Let me just make a quick comment on transaction environment and then I'm going to turn it over to Joan. So a little bit on the sources. First of all, we just went over in great detail why we're generating cash. So the cash flow generation for the company is going to be very robust. Secondly, the transaction environment is healthy. But honestly, I see an even better environment as we move further into this year. And my confidence in that is primarily driven by what I'm seeing in group bookings and how they're evolving. And our connections to and contacts to travel managers and meeting planners all tell me that we're going to see growing momentum over the course of the year which means that we will have a broader array of properties that we own that we would go to market on as the year unfolds. So I think we're going to be generating, in addition to operating cash flow, additional proceeds. And Joan will now explain how we're thinking about the priorities of what we're going to do with the money.

[Joan Bottarini:]

Right. So as we've made each of our commitments, our sell-down commitments, we have asserted and committed that the proceeds from those sales would be used to reinvest back in the company. Because of the timing of the ALG acquisition, we took on some incremental debt to pay for the acquisition. So what we have to turn to first is to ensure we're doing some deleveraging towards the end of this year which I commented on in my prepared remarks. So, we will use some of that excess cash and those proceeds to delever and this is very consistent with our commitment to retaining investment-grade status. And that's what our near-term plans are. Beyond that, we'll keep you posted.

[Smedes Rose:]

Okay, thanks. Okay. And then I was just wondering, could you just say what is the average price of the contract or the membership when someone buys into your -- to AMR club?

[Mark Hoplamazian:]

Thanks for that. The answer is, first, you need to understand that there are multiple tiers within UVC. And so the average is taken across a number of different price points that provide very different types of benefits to their members. If you look back and you try to take an average over time which has moved because there have been ebbs and flows in terms of what level of memberships have been sold -- have been more popular in certain periods of time, the averages have run between $10,000 and $15,000 per contract. And so maybe if you think about it in that range but imagine that the midpoint of that is probably a good rough estimate for what the value of the contract would be running. But it's going to vary in that range which I know it's a broad range but it just -- it depends on what the demand is at the different tiers at a given point -- in a given quarter or in a given year, yes.

[Smedes Rose:]

And then the vast majority are financed. So I'm just wondering, what's the kind of spread to you on what your -- what the customer is paying in interest versus, I guess, your -- would you just look at like highest -- sort of average cost of debt? Or how does that work?

[Mark Hoplamazian:]

I -- first of all, there's a dynamic which is a down payment that runs from 30% to 50% on average. And then the actual payoff of the remainder is, in all cases, less than four years. But really, the bulk of it is repaid in the first couple of years that follows. And there is an interest factor that apply to the net financed contracts. I don't know -- I can't say to you what the exact amount is.

[Smedes Rose:]

Okay, thank you.

[Mark Hoplamazian:]

Operator, can we take our last question?

[Operator:]

Certainly, your last question comes from the line of Chad Beynon from Macquarie Group. Your line is open.

[Chad Beynon:]

Hi, good morning, thanks for taking my questions. One more on the ALG accounting that we're receiving from clients. As we look at Slides 14 and 15, you broke out the EBITDA, the deferrals, the financed portion. On a percentage basis on, I guess, 2021, the back half and then for the quarter, it looks like EBITDA is kind of 15% to 20%, the deferral is 50-ish percent and then the financed is the remainder. You gave us the waterfall chart later in the deck. But as we think about that breakdown, roughly like 20% EBITDA, 50% deferral and then the remainder financed, is that how this could look over the next couple of years just given that people are continuously investing or joining the membership club? Just trying to get some more color on that breakdown. Thanks.

[Mark Hoplamazian:]

Yes. So thank you for that. Look, there are a couple of factors here. First, recognize that the growth of the AMR Collection which is a principal driver of the growth of UVC memberships, has been very high. The portfolio itself has grown enormously and the compounded growth of UVC memberships has been 18% over the last five years. So when you're in a growth period like that, it actually has the effect of, effectively, what I would describe as pulling down the adjusted EBITDA figure and having relatively higher deferrals and net financed contracts in relation to that. It's really difficult to attribute the deferrals and the net financed contracts and say, "Oh, well, that's UVC as a business" because UVC exists as a result of AMR existing. And it's fully -- it's sort of like -- think of it as a distinct channel of distribution but the memberships themselves are actually derived from the network of AMR. So we look at the AMR Collection and the UVC program as integral parts of one business. And so I would caution you not to think about the deferrals and the net financed contracts as being "UVC." I think you have to look at the totality of the earnings. We've already said that it's roughly a 70-30 split between AMR and UVC as one line of business and Vacations as another. And I think that that's true. But the specific answer to your detailed question about the composition and how adjusted EBITDA shows up is driven by the fact that with growth, you actually post negative adjusted EBITDA for every contract that you're signing which pulls that piece of the equation down. I hope that was clear.

[Chad Beynon:]

Yes. Thank you, Mark. I appreciate that.

[Joan Bottarini:]

For GAAP purposes.

[Mark Hoplamazian:]

For GAAP purposes. Thank you, Joan.

[Chad Beynon:]

Okay. And then last question on the core business. The monthly and even weekly RevPAR recovery that you gave us was really helpful. I think you said December was up to 84% of pre-pandemic levels. I know there's a lot of moving pieces and you mentioned that March hasn't had cancellations. And I think historically or seasonally, that's a strong leisure period with spring breaks and the like. Is there any reason or anything that informs you that March couldn't get back to these December levels based on what you're seeing, based on what we're seeing in vaccination and just where the group and BT is going at this point?

[Mark Hoplamazian:]

There's no reason, no reason whatsoever to think that we're not on that trajectory. I'll tell you -- I'll just give you a real-time data point as we sit here right now. Presidents Day weekend which is just ahead of us, up double digits relative to 2019 in our legacy Hyatt portfolio. So I would just tell you that Omicron considerations have dissipated as quickly as they rose at the inception. And we keep talking about this term pent-up demand. It's just a -- it's an enduring level of people who really feel compelled to get out, to engage, to connect. And we're seeing it come up data point after data point after data point. So, that's just -- I know it's one fact and an anecdotal one at that but it is real time. It's like right upon us this coming weekend and that's where we stand.

[Chad Beynon:]

That's great. Thank you very much. I appreciate it.

[Mark Hoplamazian:]

Okay. Thanks, everybody. Thanks for joining today.

[Operator:]

This concludes today's conference call. Thank you for your participation and have a wonderful day. You may now disconnect.