Welcome to the Wyndham Hotels & Resorts Second Quarter 2021 Earnings Conference Call. At this time, all participants have been placed on a listen-only mode and the floor will be open for your questions following the presentation. I would now like to turn the call over to Matt Capuzzi, Senior Vice President of Investor Relations.

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.

Thanks, Matt, and thanks everyone for joining us this morning. We were very pleased with our second quarter performance where global Rev PAR increased 110% versus last year, and where our domestic economy Rev PAR exceeded 2019 by nearly 4%, increasing every month versus both last year and the year prior. For the month of June, not only the domestic economy Rev PAR increased 680 basis points compared to June of 2019, but the overall domestic system, including our many upscale and upper upscale brands, exceeded June of 2019 by 70 basis points. This was the first month that this has occurred since back in February of 2020. With improving leisure demand combined with a continued market share outperformance of our brands and the structural cost savings from our 2020 organizational restructuring, we generated $168 million of adjusted EBITDA, which was more than we generated in the second quarter of 2019. We delivered another clean quarter on both the P&L and cash flow fronts, with free cash flow this quarter of $104 million, increasing $264 million from the second quarter of 2019. We opened 9,800 rooms, which was nearly 30% more rooms than we opened in the first quarter and over 70% more rooms than we opened last year. With strategic removals of non-profitable licensees now behind us, terminations were 57% lower than last year. We awarded 154 new hotel agreements, which was over 30% more than last year and only 10% below the number of contracts we awarded in the second quarter of 2019. The continued pickup in our development team successes around the world resulted in a 170 basis points of sequential pipeline growth and 580 basis points of year-over-year growth in our development pipeline, which climbed to over 190,000 rooms at the end of June.

Thanks, Geoff. And good morning, everyone. I'll begin my remarks today with a detailed review of our second quarter results. I'll then review our cash flows and balance sheet followed by our 2021 outlook. During the second quarter, we generated $321 million of fee-related and other revenues and $168 million of adjusted EBITDA. Second quarter Rev PAR has now recovered to 83% of 2019 levels, down only 5% domestically and down 44% internationally on a constant currency basis. My remarks today on Rev PAR will be focused on performance as compared to 2019.

Our first question will come from David Katz with Jefferies. Please go ahead. Your line is open.

Hi, good morning, everyone. Congrats on the quarter. I wanted to start off, if I may, with capital returns and the dividend increase. When I look at our model and sort of where we think we should be this year, next year and beyond, getting to sort of a mid-20s payout against the free cash flow that we're modeling. Michele, if you could just help us think through what might be a reasonable path for that dividend. And maybe we've had a little discussion about how you all are thinking about share repurchases over time.

Sure, David. Good morning. So, from our perspective, the $0.24 per share dividend payment would round out to just above the mid-30s, I believe, when we look at a net income payout ratio; that's the way we're thinking about the dividend. With these two increases, we should now be at about 75% of our pre-pandemic level. And that is right in line with how our earnings have been recovering. From a capital allocation perspective, I would say, as always, our first preference is to invest in the business for future growth. From leverage, we target 3 to 4 times; we expect to be back within that range at the end of this year. And so we don't see any need to allocate capital to debt repayment. And then it comes down to dividends, whether or not there are any other M&A opportunities out there, and then, of course, share repurchase. We feel comfortable with where the dividend is right now. And so that really leaves us with M&A and share repurchase. There are no restrictions on share repurchase today. We have $191 million available under our current authorization, and we expect we hope to be in the market this quarter.

Perfect. And if I may follow up, one for Geoff. Your largest franchisee has been exploring alternatives, as they've announced. Is there anything that you were able to say about what that could potentially mean for you?

David, it wouldn't be appropriate for us to comment certainly on their process. Their press release last week or the week before noted that they're reporting sequentially improving performance. And they're on track to sell down to 105 hotels. In terms of what it means for us going forward, we anticipate that those core hotels they talk about will remain a part of the Wyndham family as managed hotels and franchise agreements, as have all been one of the tickets 135 or 136 hotels that they have sold to date. The hotel management agreements do not have any change of control provisions. And there are no automatic cross-term rights between RHMS and franchise agreements. And look, they're some of their best hotels in solid locations, and we anticipate that they'll remain as part of the Wyndham family going forward.

Okay, perfect. Thank you very much.

Thanks, David.

Your next question comes from Joe Greff with JP Morgan. Please go ahead. Your line is open.

Hi, good morning, Geoff, Michele, and Matt. I want to discuss net earnings growth related to the long-term targets mentioned in the slide deck, specifically moving from 1 to 2 and then from 2 to 4, and eventually from 3 to 5. However, I have a more specific question. Considering your current pipeline of 190,000 rooms and the conversions that may not entirely be reflected in the development pipeline due to their short-term nature, is there a particular reason why you couldn't open the same number of gross rooms in 2022 that you did in 2019?

There's no reason in '22. In terms of where we are right now on our 1% to 2%, we were feeling very good as we previewed last call. Joe, our rooms would be back-end loaded. Our 10,000 rooms that we opened in the quarter were 30% more than we opened last quarter. And we're still expecting to open over 50,000 rooms this year, which would be over 80% of what we opened back in full year 2019, when we ran 3% net room growth. With over a third of that 50,000 rooms now achieved, we feel as we said in the script, seasonally on pace with our historical trends. In terms of what we're seeing on the conversion front, it just continues to pick up; conversion rooms as a percentage of our total continue to increase from 50% of our global room openings last year to 70% this year and increased to where we opened 500 basis points over what we opened in the second quarter of 2019 in conversion activity. So no, there's no reason in terms of 2022 that we couldn't be back.

Great. And then my question here is, Michele, you mentioned that the back half of '21 Rev PAR guidance implies getting back to 19% of 2019 second half Rev PAR levels. Is there a 3Q is that much higher percentage? Kind of where I'm going with this is trying to understand sort of the mix between leisure and your business in 3Q as a transition for the 4Q mix. But is that how you're looking at it? Is that as a percentage of 2019 3Q will be stronger than 4Q because of the mix? Or is there something else that you need to be mindful of when thinking about it as a percentage of 19 between those two quarters?

No, Joe, I think you've got it. In the third quarter, we definitely have our strongest pricing power, which will lead to a higher overall revenue per available room than in the fourth quarter. I don't believe our business and leisure mix changes significantly between the third and fourth quarters. It really depends on overall demand levels and our capacity to adjust prices based on that demand. When considering seasonality, in 2019 we generated about 30% of our full year EBITDA in the third quarter and around 22% in the fourth quarter. I expect that 2021 will follow a similar trend.

Thank you.

You're welcome.

And we'll take our next question from Stephen Grambling with Goldman Sachs. Please go ahead. Your line is open.

Hey, good morning. Thanks for taking the question. I guess as you think about the strength of your Rev PAR index across brands and strength of loyalty bookings. Where are you thinking about reinvesting back into the system and other opportunities to either change, improve, or monetize the loyalty program in a recovery?

Sure. Thanks for the question, Stephen. There's absolutely opportunity to both continue to invest in driving our Rev PAR index. We think that what we've talked about before in terms of the investments we've made on the technology and the marketing front, we've talked on the last call, I won't go through them again, the four big investments we made on the customer data platform, on our Salesforce Lightning rollout, on our mobile booking app, on our Wyndham direct billing solution, which is going to be so important moving forward, we think for gaining more share from infrastructure accounts. The continued investments we're making on technology. I mean, this quarter, we rolled out new property management cloud options and we believe several property hubs will have the fastest check-in and check-out and will be the first for economy midscale hotels with single image inventory not requiring any two-way interfaces. So those are all we believe investments that have been driving that outsized share gain that we've seen, up another 300 basis points this quarter. In terms of what we're doing on the Wyndham Rewards side. We've talked a lot about how we are attracting under-travelers; we are seeing our marketing teams catch a much wider net as we talked about in our script to target millennials to really move them up the marketing funnel. I mean, the video played is massive right now in terms of the role it's playing in attracting those travelers and really leading into insights and automation with Google, for example, across all of their search, display, and YouTube channels to get a clear picture of where that traffic is coming from. On Alphabet's call two days ago, they talked about Wyndham driving two times the number of direct bookings at a lower cost of acquisition, which is generating incremental impressions that millennials are seeing on their devices. To the extent that we can roll those millennials into Wyndham Rewards, we believe that we could continue to grow and we added another 2 million members this quarter to Wyndham Rewards, we could continue to grow that program and grow that all-important shared occupancy which is now contributing roughly one out of every two check-ins.

That's helpful. And then if I follow up to Joe...

I would just add to that. We're continuously evaluating the loyalty program to determine its relevance given current market dynamics. And from an investment perspective, Geoff hit on all the key points for how we're investing in capturing greater market share. I would also say we are making investments on the development side; we had already increased the amount of money we allocate to development advances. So we're now earmarking $40 million a year for that. We are looking at deploying that capital not only to attract new developers, but also to attract developers that previously had not done business with us before, as well as to continue to improve the overall quality of our brands.

That's helpful. Following up on Joe's question about unit growth, have you noticed any changes in the financing market for new construction?

We're finding that financing is still out there for franchisees that are looking to develop. We haven't seen any developments in our pipeline fall out yet. Because anything significant is different than anything out of the ordinary from the past. There certainly is, we believe, still opportunity out there, especially within our community for financing. It's a very local, much more localized and regionalized lending environment than it is in the more upper upscale markets.

Super helpful. Thanks so much.

Thanks, Stephen.

We'll take our next question from Gregory Miller with Truist Securities. Please go ahead. Your line is open.

Thank you. Good morning, Geoff and Michele. I want to start off with hotel staffing and labor costs, which was obviously a big industry topic. Can you share on how material of an issue this is for your franchisees today? And is it fair to say that the challenge to be higher is less of a headwind for many of your economy and midscale hotels?

I think it is fair, Greg, thanks for the question. For our economy and midscale hotels, it's certainly, as we talked about on the last call, much less of an issue in the select service space. Our economy and midscale hotels do not have restaurants, they do not have banqueting halls, and they do not have convention facilities. Labor has been an issue in this industry long before the pandemic. Before COVID back in '19, our industry had 10 million jobs available and only 9 million of them were filled. But it is certainly estimated to be in the economy segments 12% of gross operating revenue from a cost basis, to your question, versus 35% of gross operating revenue for the overall U.S. industry. It's still very much an issue. And it's been the driver of so much of what our teams have been working on, the elimination of breakfasts for our large economy brands, which have reduced our economy breakfast cost for our franchisees by around 50%. The stay-over cleaning on request has certainly helped and has been embraced by the Franchise Advisory Council. We will continue to focus on trying to eliminate other costs as we move to more digital to drive additional savings for our franchisees. But yes, I mean, our industry needs more housekeepers, we need more guest service agents, we need more culinary team members. Our operation support teams are working very hard to educate our owners on what they can be doing from a daily labor monitoring basis. We've got a lot of tools and software out there. What we could be providing to attract employees and associates better benefits, worker flexibility, and how we could leverage staff among neighboring hotels. Our franchisees, our small business owners, are working very hard at recruiting and trying to get the word out on just what a great industry this is.

I appreciate all the insights. And as you mentioned the housekeeping piece, as my follow-up, do you anticipate falling one appears and making the overnight housekeeping cleaning permanently optional for your hotel?

I think that's where the industry is heading. Again, working with our Franchise Advisory Councils, we are providing room cleans on a request basis which has been well received by franchisees and also by guests right now in terms of guests not necessarily wanting folks in. We're certainly, as a standard, providing clean on longer stay overs on every third day. But I think your point is well taken; I think that's probably where this industry is headed.

Right. I appreciate all the color. Thanks.

Thanks, Greg.

And we'll take our next question from Ian Zaffino with Oppenheimer. Please go ahead. Your line is open.

Hi, great. Thank you very much. The first question may be for Michele. On the free cash flow generation, I guess can you just talk about the roll-offs and the costs and how we're supposed to be looking at the cash flow going forward? I know there are integration hits, there were another one-time items. Just help us think about going forward, puts and takes potential one-timers, etc.

Special item cash outlays are behind us. At this point, we expect to convert cleanly from EBITDA; our guidance indicates that approximately 55% of our adjusted EBITDA will convert to free cash flow, and that is what you should expect for 2021.

Okay. And then, we talked about net room growth, can you actually disaggregate that maybe between terminations and strategic removals, gross adds? I guess, and then also, just have one more topic that slammed in there is how you kind of pacing versus your $40 million costs base target? Thanks.

On the $40 million of costs base, our outlook assumes full achievement of that $40 million, and we're tracking precisely on target to that achievement. I'll hand the call over to Geoff to talk about network growth.

Yes, we always see the fourth quarter as our busiest time for openings. We believe we are on track with terminations, having 60% fewer than last year and over 20% fewer compared to the second quarter. We are optimistic about returning to the economy and midscale segment where we've historically enjoyed a 95% retention rate, similar to what we experienced in 2018 and 2019. In fact, back in 2019, we were aiming for a 96% retention rate domestically. We are satisfied with the progress made and feel aligned with the room growth expectations for 2021. There should not be any additional strategic terminations.

Okay, great. Thanks, guys. Appreciate that.

Thanks, Ian.

And we will take our next question from Michael Bellisario with Baird. Please go ahead. Your line is open.

Thanks, good morning, everyone.

Good morning, Mike.

I would like to revisit your comments regarding development. Can you discuss your observations on signings and provide more insight into the differences between domestic and international performance? Are you noticing any relative weaknesses overseas, especially in light of a slow recovery compared to the stronger performance you're experiencing? What is your outlook on this?

We have been pleased and somewhat surprised by the strength of our pipelines globally, despite the sluggishness reported in the press. Domestically, our pipeline increased by about 6% year-on-year, and it was also up 6% internationally. On a sequential basis, we saw a 230 basis point increase internationally and a 70 basis point increase domestically. We experienced 6% growth year-on-year domestically and a noteworthy 20% growth in conversions. In China, our pipeline grew by 11% year-on-year, while in Latin America, it was up by 15%, with a 23% increase in conversion pipeline. Europe stood out with a 16% increase in pipeline, and conversion rooms surged over 75%, particularly benefiting Ramada. Conversion rooms in the pipeline increased both sequentially and year-on-year. We were also surprised by the growth in new construction, which rose by 4%, from 135,000 rooms to over 140,000 rooms. Internationally, we've focused on expanding by opening new offices and adding franchise sellers who concentrate on direct franchisees. Since our spin, we've introduced new brands to 50 countries where we had not previously established direct franchising agreements, and we are seeing significant success overseas. This is mirrored by our new construction efforts here in the U.S. with our brands like La Quinta, Microtel, and our dual-brand offerings of Microtel, La Quinta, and Hawthorn Suites.

Got it. That's helpful. And then just one more for me, just on the master franchise agreements that you have in China, has your view changed at all on that potential investment opportunity? And maybe how do you weigh some of the headline risks that seem to have resurfaced recently there?

Yes, go ahead Michele.

No, please Geoff, you first.

Yes, I mean, we're certainly monitoring the headline risk. But we're certainly not anticipating or seeing anything that is impacting us on the development front. Michele?

And I would say our view hasn't changed. We continue to be the logical buyer of that master franchise agreement. But at this point, we're happy with the production and how they're growing the system.

Understood. Thank you.

Thanks, Mike.

And we will take our next question from Dany Asad with Bank of America. Please go ahead. Your line is open.

Hey, good morning, Geoff and Michele.

Hey, Dany.

I'm just trying to think of the undercurrents below that Rev PAR expectation of being 10% below '19 for the back half of the year. Can you help us understand the cadence of what, like, of that progression whether it's domestic versus international or leisure versus corporate for the balance of the year?

Sure. It's a question on everyone's mind. I'll let Michele share her insights on the cadence and connect it to the outlook she previously discussed. We believe leisure demand will remain strong into the fall due to pent-up demand, longer multi-night bookings, and an increase in average length of stay. Domestic economy Rev PAR is expected to continue outperforming other segments, as it has for the last four months. Even during last fall's COVID case spikes, demand remained consistent. Our business travelers, who maintained their travel throughout the pandemic, will likely continue to do so into the fall. This could be further boosted by the infrastructure package recently approved by the Senate. While there's still progress to be made, it's moving forward. Regarding domestic Rev PAR, we anticipate it will keep following its current trend. Internationally, we're observing solid growth, particularly with China leading the way. U.S. air travel to Europe is increasing, and we're also seeing improvement in European travel, with Germany's decline narrowing from 70% in June to 50% in July. The U.K. stands out, with a decrease from 30% in June to just 10% so far in July. In Turkey and similar countries where we have a strong presence, we're witnessing substantial improvement, largely driven by leisure demand.

Thank you very much.

And our final question comes from Alton Stump with Longbow Research. Please go ahead.

Thank you. Good morning, everyone. In relation to the previous question, it's worth noting that although we are discussing a short three-week period, Europe has shown a 7% improvement domestically. This is in contrast to our expectations for the second half of the year compared to 2019. Overall, while there may be challenges, I anticipate positive domestic growth that will help mitigate the overall decline, estimated at around 10%.

I think we will absolutely see stronger domestic performance than we see in the back half than international, although our guidance does assume continued trends in the U.S. and improving trends overseas. So yes, I think the domestic number will be much stronger than the international number.

Great, thank you, Michele. And then just a quick follow-up on that just occupancy versus ADR integrate as we move into the fourth quarter. Is there anything that you would rather see improved faster? Or is it just a matter of both improving at the same pace?

Yes, we'd love to see them both improve faster, but we are very pleased with how our franchisees have been optimizing rate in this growing demand environment, and that is something we expect to continue to see throughout the rest of the year.

Okay, great, thanks Michele.

Thank you.

And there are no further questions, I'll turn the call back over to Geoff Ballotti for any closing remarks.

Thank you, Ashley. And thanks, everybody for dialing-in. We look forward to speaking with many of you in the weeks ahead and hopefully seeing a few of you at the Asian American Hotel Owners Association Conference next week in Dallas, where Michele and I will be in the booth all week with our franchise sales team. The following week, we'll be down in Greensboro, North Carolina with our top customers and developer prospects at historic Sedgefield Country Club for the playing of the 15th Wyndham Championship, the last stop on a PGA Tour before the playoffs. You could certainly catch it live on the Golf Channel and CBS from August 12th through the 15th. Enjoy the rest of your summer everyone and thanks again for your interest in Wyndham Hotels and Resorts.

Thank you. And this does conclude today's program. Thank you for your participation. You may disconnect at any time.