Wyndham Hotels & Resorts, Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Feb 2021

[Operator:]

Good day and welcome to the Wyndham Hotels & Resorts Fourth Quarter and Full Year 2020 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 Securities 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.

[Geoff Ballotti:]

Thanks, Matt and thanks again, everyone for joining us today. Before I talk about the fourth quarter, I’d like to thank our 9,000 global team members who help us successfully navigate the tremendous challenges of 2020, along with all of our owners who continue to support and work with our teams in the field as we collectively look to a brighter 2021. The power of Wyndham’s economy culture was never more in display than it was last year. And we are tremendously proud of how our teams and franchisees performed. Approximately 97% of our nearly 9,000 hotels remain open today. Our fourth quarter continued to demonstrate that our drive to non-urban franchise business model can deliver in any environment. And we made sequential progress on multiple fronts. Our adjusted EBITDA and cash flows were both ahead of our expectations. Our brands in the U.S. continue to gain market share, and our room openings and new hotel contract signings continued to accelerate. We also completed the strategic termination plan we previewed with you on our second quarter call, removing over 20,000 non-compliant brand attracting rooms from our system, along with removing an unprofitable management guarantee deal signed back in 2012. Removing these rooms from our system will not only strengthen our long-term royalty rate and the quality and performance of our brands, it will open up development tracks and important markets where we now have teams in place to sell direct franchise agreements for full royalty fee deals. RevPAR in Q4 finished down 31% domestically, down 44% internationally and down 35% globally on a constant currency basis. In China, fourth quarter RevPAR was down only 10% year-over-year, an improvement of 20 points from the third quarter. At down 31% Q4 is domestic RevPAR improved sequentially from Q3 is down 32% driven by occupancy, as average daily rate continued to hold steady. This trend continued in January with RevPAR improving 7 points sequentially from down 31% in Q4 to down 24% for the first month of 2021.

[Michele Allen:]

Thanks, Geoff. 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 balance sheet and cash flows and provide our best view of certain 2021 projections. We generated $296 million of revenue and $56 million of adjusted EBITDA in the fourth quarter, which brings our full year revenues to $1.3 billion and full year adjusted EBITDA to $327 million. Fourth quarter revenues, excluding cost reimbursement revenues decreased $126 million, primarily reflecting a 35% decline in global RevPAR as well as a $50 million decline in license fees. Adjusted EBITDA declined $97 million to $56 million in the fourth quarter, reflecting the revenue changes partially offset by a 15% reduction in costs. As expected marketing fund expenses exceeded marketing fund revenues by $26 million; adjusted diluted earnings per share was $0.07. As Geoff mentioned RevPAR in Q4 finished down 31% domestically and 35% globally in constant currency.

[Operator:]

Thank you. We’ll take today’s first question from David Katz with Jefferies. Please go ahead.

[David Katz:]

Good morning, everyone. And thanks for the detail. Just if we could step back from any sort of near-term, as we – look, we’re all trying to get our models dialed-in in the near-term and sort of get the quarters right. But taking a step back and looking at the business from 30,000 feet, how do we think about the unit growth, the room deletions, and how that comes out the other end with a more refined and a faster growing or better growing engine of fees. And how would you help us sort of think about that, particularly as it relates to free cash flow?

[Geoff Ballotti:]

Thanks, David for the question. Absolutely, it helps us longer term in terms of what our teams succeeded at with some really strong master licensed partners overseas, but in agreement with them, our ability to remove 20,000 non-compliant brand attracting rooms both in 2019 and 2020, many of these rooms dating back 15, 20 years and no longer current on their payment terms. I think those several things for us from a cash generation and a fee generation standpoint, whether these master license rooms where in China or whether they were in the Middle East, as we said on the script, it is opening up right now for us new development tracks for franchise sales and development teams to sell direct. I mean, I’ll take a city like a Riyadh in Saudi Arabia, where we no longer have that master license agreement. Our teams are right now in that city trying to sell Ramada, which we have the ability to have directly and Wyndham and Wyndham Grand. We have grown our international direct net room growth in 2018 and 2019 in the high single digits. We want to get back to that. We had net room growth internationally on a direct basis in 2020 in every market, but China. And now with direct representing over 60% of our international rooms at a three to four times higher royalty fee rate than what our master license agreements were at, and that 60% was less than 50% a while ago. It is going to be what continues to move our royalty rate internationally and globally, which you’re beginning to see over time and with higher quality product and newer product.

[David Katz:]

Got it. And as my follow-up, I know it’s an important concept to just keep track of conversion activity, which is expected to be an important part of unit growth. What are you seeing out there?

[Geoff Ballotti:]

We’re seeing just as – we saw in the third quarter continued pickup sequentially, we picked up from Q3 to Q4 conversion rooms, both on the opens and executions in terms of what we added to our pipeline. Conversion openings in the second half of this year grew 60% to the first half and conversion signings grew 70% from the first half to the second half. And we expect this conversion percentage to grow. You think about 2019, 70% of our gross adds were conversions. If we look back in 2008 and 2009, after the great financial crisis, that conversion percentage grew to 90% of openings. And we could see that happening. We’re out hiring more conversion sellers, both domestically and internationally. We’re deploying more of our new construction sellers, both in the U.S. and internationally to our conversion brands. And we’re seeing conversion opportunities internationally the years ahead. Again, there’s a 100,000 non-branded economy and mid-scale rooms out there globally. We have strong conversion franchise sales and development teams in place, and would expect that to continue to pickup.

[David Katz:]

Thank you very much. Good luck.

[Operator:]

And our next question is from Joe Greff with JP Morgan. Please go ahead.

[Joe Greff:]

Good morning, everybody. Geoff, just – and Michele, regarding the 1% to 2% net rooms growth for this year that assuming that you retain or approach that 95% retention rate that implies, if somewhere in the 50,000 of gross room adds, I just want make sure my math is right on that. But if that 50,000-ish plus of gross room adds, what’s the breakout there between conversions and new construction and of the stuff that’s in the new construction bucket, how much of that relates to construction that was pre-COVID versus before the onset of COVID?

[Geoff Ballotti:]

Sure. I think, your math is right, Joe. We opened 65,000 rooms. In 2019, we opened 70% of in the second half of 2020 what we did in 2019. So if we could get to 80% of what we did in 2019, that’s exactly on your math. That’s 50,000 opens. And assuming our teams get back to a 95% normalized retention rate that gets us right to the midpoint. And obviously, we’re committed to getting back to that 2% to 4% growth. In terms of what opens out of our pipeline, and what percentage is new construction, as I just said, I think you’re going to continue to see that pickup. It was about 60%, 65% in 2020 being conversions. That number could go obviously higher as we were just talking about, it did in 2008, 2009, but we’re also seeing in our pipeline an interest or renewed interest in our new construction rooms and signing. So it’s early to break it out exactly, but I think you’ll see conversions continue to pickup.

[Joe Greff:]

Great. And then longer term, your target is 2% to 4% net rooms growth. How much of that accelerated growth relates to further retention globally versus gross room add acceleration? And I’m presuming some of the gross room acceleration for you to accelerate the gross rooms at some point in the future, how much of an increase in advances and support from Wyndham, do you need to support that 2% to 4%? I know, you talk about 49 advances for this year, how much higher would that go to the part of that 2% to 4% path?

[Michele Allen:]

Joe, it’s Michele. I think that 2% to 4% is really just getting back to our 2019 open – excuse me, opening levels. And then any additional retention favorability we would say would be able to drive us up from the 2% to 4%, which is consistent with our pre-COVID plan. I would also think that, from a key money perspective, we are putting more capital to work in this particular environment because we think there’s more opportunity to attract deals just because of their financing is and so. Owners are going to be more attracted to fields where we can participate in capital stack. That’s not always the case. But that is certainly the case right now. And we’re hopeful that that will attract the right hotels in the right markets for the brands that we really want to grow. And more importantly, conversion opportunities in the near term to help fill the gap on the transaction volume side and then as well to get us back to the 2019 openings levels.

[Joe Greff:]

Great. And then one final follow-up, quick one here. Looking at your Slide 30 in the investor presentation, the illustrated example, not the guidance scenario, but if you do end up in that $425 million, $450 million EBITDA range for this year, does that put you on a path where the second half of this year we could see some resumption in buyback activity?

[Michele Allen:]

So I would say – well – okay. So I will take this opportunity to say that is definitely not meant to be guidance. It is also a conservative view because we did know by putting a hypothetical EBITDA number out there, where we would run the risk that it would be assumed to be some version of guidance. So it doesn’t. The math is not going to work as perfectly as you guys would want it to, because it definitely has some conservatism built into that. I would say, the share buyback is going to move more in line with free cash flow generation, but that will obviously be tied to EBIDTA generation. So depending upon how much excess cash the business is generating that will when we are ready to resume share repurchases, we continue to place a high level of emphasis on capital First, you can see that in the actions we’ve taken on the dividend side and share repurchase will follow at the appropriate time.

[Joe Greff:]

Thank you.

[Operator:]

And our next question from Patrick Scholes with Truist Securities. Please go ahead.

[Patrick Scholes:]

Good morning, everyone. A couple of questions for you. Now how should we think about the trajectory of G&A growth throughout the year? And related to that, do you see yourselves rehiring staff, given the rebound in the economy hotels, or our headquarters and corporate staffing reductions do you see more as permanent?

[Geoff Ballotti:]

Well, I’ll start. And then from cash stand point, I think, corporately, where we’re needed – we’ve made some slight adjustments, but most of what, as we’ve said before, we’ll stick. When you talk about economy hotels, just to be clear, those are all franchise agreements, and they’re not our team members in there. There are a lot of team members out there in our economy hotels that are out of work that our owners I know are working very hard at bringing you back to work. Go ahead, Michele.

[Michele Allen:]

Yes. Thank you. Patrick, I would say from a G&A perspective, modeling, we can come at it two ways. I think we’ll probably be around $5 million favorable to 2019 levels per quarter. So that’s about half of the $40 million that we expected the stick will come through the G&A line item on a cash basis. There will be some non-cash items that mask that, and we can help you guys reconcile that. And then the other half of the $40 million will sit on the operating expense line item. So I think, the G&A is going to be about probably a 15% reduction to the 2019 levels.

[Patrick Scholes:]

Okay. Thank you for the color on that. That’s helpful. And getting into the wheels perhaps a little bit more here, I know that historically you’ve held an annual conference usually in April timeframe and probably is not going to happen this year. Any special earnings or modeling nuances we should be aware of around that. So I mean, my assumptions are correct in that conference.

[Michele Allen:]

Yes, Patrick, we’re actually not going to be hosting a large annual in-person event in 2021. It typically would have happened in April, I believe this year or potentially in September, and we’re just not comfortable committing to that timing for 6,000 plus franchisees to come together in a non-virtual setting. We are going to create some opportunity to bring our franchisees together in some whistle-stop tours and get our brand leaders and DFOs out in a more organized fashion to collect feedback from our franchisees. We do that on a one-on-one basis throughout the year. But we want to do it in a more organized fashion to bring a group together and so we’ll do that on a smaller scale, so no large conferences here from a modeling perspective.

[Patrick Scholes:]

Okay. Thank you very much.

[Operator:]

And our next question is from Stephen Grambling with Goldman Sachs. Please go ahead.

[Stephen Grambling:]

Hey, thanks for taking the question. One follow-up just on the cost side. Can you just remind us, I think you had previously talked to some kind of permanent benefits that you’d adopt from cost outs? Can you just maybe update us on what your latest thinking is there and the major buckets and if that’s changed at all?

[Michele Allen:]

Yes, sure. When we implemented our COVID plan, it was $255 million of cost savings for the full year 2020. We expected $40 million of that would flow through EBITDA on a more permanent basis in 2021 and beyond. And we’re expecting to see that in the operating expense and G&A line items. The majority of it is salary and wages and facility costs as a result of our restructuring plans, including our international reorganization.

[Stephen Grambling:]

Great. And then I may have missed this. But can you talk a little bit more about the guardrails or the way that you were trying to think about the $40 million in development advances? Why is that the right number? How has developers responded to that? And then how are you thinking about kind of free cash flow conversion longer term versus the 50% guided?

[Michele Allen:]

Right. The $40 million is a budget right now, if there are lots of opportunities we’re happy to spend more than $40 million. From our perspective, it’s all about the IRR on the deal. So we’ll deploy that domestically, potentially even internationally to the right deals in the right markets. Conversions, new constructions, there will be – from an IRR perspective, it’ll hit our hurdle rates, which is higher than our WAC, and also includes some risk adjusted premium for the specific deal and the specific market, particularly if we were talking about international deals. Some of those would have higher hurdle rates. And so if there is potential to spend more than $40 million, we would. From a free cash flow conversion rate, it’ll put a little bit of pressure on the conversion. We don’t expect to have an elevated spent into perpetuity, right? We think this is in direct response to what we’re seeing in the marketplace today and responding, reacting to today’s opportunities. I still $40 million level, we would be able to get close to 55% to 60% on free cash flow conversion when demand begins to normalize.

[Stephen Grambling:]

Got it. That’s helpful. Awesome. I’ll jump back in queue. Thanks.

[Operator:]

And our next question is from Ian Zaffino with Oppenheimer. Please go ahead.

[Ian Zaffino:]

Hi, great. Just kind of like to circle back on 2020, as you look at it, what brands were basically the biggest drivers or did the best from a RevPAR perspective throughout your portfolio, which brands are you the happiest with, which brands need the most work, maybe just some color there. Thanks.

[Geoff Ballotti:]

Thanks, Ian. Yes. As we called out in the script, La Quinta is, I would say by far and away the brand that we’ve been happiest with. I mean, just thrilled with how well it’s performed through this downturn with nearly 600 basis points of market share. And we saw that market share just grow each quarter. So much of it was rate-driven, which was great to see. Thrilled with obviously what’s happening in the extended stay space with Hawthorn, which was actually up a lot higher, almost 2x to what La Quinta was. But that’s just the state of extended stay right now. And that brand is doing very well. As we remove brand attracting Hawthorn Suites as we open new construction, Hawthorn Suites new construction, Hawthorn Suites and La Quinta hotels, I think, we’ll continue to see that share grow. And look, our Days Inn and Super 8 brands, against their chain scales are at 100% performing really well. They’ve been big additions to our pipeline and our conversion activity. And on the new construction side, I’d say, our team is thrilled with Microtel, which against its chain scale is at about 115% in index and just continues to not only gaining market share, but gaining interest from developers that are looking to build and to sign new hotels. We added our conversions in the pipeline continue to pick up and a big part of that were from the Microtel and La Quinta and Hawthorn Suites brand.

[Ian Zaffino:]

Okay. Great. Thank you. And then maybe another question would be on the dividend. I mean, glad see the dividends going way up still below 2019 levels. What do we need to see to kind of get back to those levels? Thanks.

[Michele Allen:]

It is below 2019 levels. And the $0.16 is the maximum allowed under the credit agreement now, and that doesn’t expire until the beginning of the second quarter. I would say, 2020 was about 50% of 2019 EBITDA. And so restoring the dividend to that same level, we thought was appropriate. And so as EBITDA returns and free cash flow returns, we would expect to see the dividend to be further restored. We want it to be obviously sustainable.

[Ian Zaffino:]

Great. Thank you very much.

[Michele Allen:]

Thank you, Ian.

[Operator:]

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

[Dany Asad:]

Hey, good morning, Geoff and Michele. My question is on the license fees. So, I know we have the sensitivity that lays out the minimum of $70 million for 2021. Can you maybe help us understand what it would take to clear that minimum threshold this year? And maybe clarify anything around the sensitivity for that line item?

[Michele Allen:]

Sure. I can do that. I think that the license fee right now is tied to the contractual minimum, which is about $1.6 billion in VOI sales. So in 2020, Wyndham Destinations VOI declined about 60%, so we would need to see it increase well over 60% in 2021 to exceed that $1.6 billion prudently. We have projected right now the contractual minimum and should they exceed that $1.6 billion? We will be happy to adjust our projections.

[Dany Asad:]

Thank you very much.

[Michele Allen:]

Thank you.

[Operator:]

We will take the next question from Michael Bellisario with Baird. Please go ahead.

[Michael Bellisario:]

Good morning, everyone.

[Geoff Ballotti:]

Hey Mike.

[Michele Allen:]

Good morning.

[Michael Bellisario:]

Could you update us on your latest thinking on potential M&A opportunities and what you’re seeing now that you have a clearer path on the balance sheet side of things today?

[Geoff Ballotti:]

Well, there’s certainly not a lot of activity that we’re looking at right now. There’s plenty of people that would like to engage in discussions with us both domestically and internationally. But I would say for the foreseeable future, Mike this year and next we’re going to be focused on just driving our organic net run growth.

[Michael Bellisario:]

Thank you very much.

[Operator:]

And we’ll go next to Robert Mullins with the Robert Mollins with Gordon Haskett. Please go ahead.

[Robert Mollins:]

Good morning. Thank you. Geoff, can you just talk about performance in California? How big of a drag was California on in January RevPAR? And has demand rebounded since the stay at home orders were lifted?

[Geoff Ballotti:]

Yes. Actually California’s one of our strongest performing markets. I believe California occupancy for us across the state was north of 60%, markets like Sacramento and San Bernardino and San Diego. California, Nevada, Arizona, the West in January was surprisingly strong. We did not see any drag. I believe Michele on our January occupancy, which certainly picked up from our December occupancy and for the first few weeks in February we’re seeing about the same trend.

[Michele Allen:]

Yes. And I would say California is definitely behaving a little differently for us than maybe our peers, because we have been benefiting a little bit from the displacement due to the wildfire. So that had helped our 2020 results.

[Robert Mollins:]

Got it. And then Michele, on the $70 million license fee guide, are you excluding anything that was included in the $83 million that was recognized in 2020?

[Michele Allen:]

The $83 million that was recognized in 2020 included points pack revenue. So we’re just bifurcating the two. So we’re giving you the projection for the license fee separate, then the points pack projections. So we’re just kind of – the line item on the P&L has both of them included and the pretax is expected to be flat year-over-year.

[Robert Mollins:]

So flat year-over-year. So there could be upside to that $70 million. Am I interpreting that correctly?

[Michele Allen:]

To the $70 million or to the points pack?

[Robert Mollins:]

For the points back added onto the $70 million, or is it points back included in that $70 million?

[Michele Allen:]

In the $70 million guide, the points pack is not in there. The points pack revenue would be included in the $2.5 million RevPAR sensitivity number we provided that would include all the other revenue line items beyond just the license fee.

[Robert Mollins:]

Got it. Thanks.

[Operator:]

It appears we have no further questions. I’ll turn the floor back to Geoff Ballotti for closing remarks.

[Geoff Ballotti:]

All right. Well, thank you everybody for your continued interest in Wyndham Hotels & Resorts. Matt and Michele and I look forward to talking to you in the weeks ahead and most importantly, hopefully seeing you at some point in 2021. Happy Valentine’s Day, everybody.

[Operator:]

And this will conclude today’s Wyndham Hotels & Resorts fourth quarter and full year 2020 earnings conference call. You can disconnect at any time and have a wonderful day.