Earnings Call Transcript - WH Q1 2021

Operator, Operator

Good day and welcome to the Wyndham Hotels & Resorts First 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. Please go ahead.

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.

Geoff Ballotti, CEO

Thanks, Matt, and thanks everyone for joining us today. Our select-service franchise business model delivered a strong start to 2021 with domestic RevPAR down 25% compared to 2019, tracking ahead of our internal estimates for the first quarter. With consumer demand continuing to increase, our RevPAR has also significantly improved throughout April. Month-to-date, our domestic RevPAR is down only 7% compared to 2019, with economy occupancy and RevPAR now running ahead of 2019 levels. Across all brands, we're seeing occupancies in the 70s in Florida, Arizona, and Utah, and in the 60s in nearly a dozen other states, including California, Texas, and Georgia. In total, 75% of our domestic system is in states that are at or above 50% occupancy month-to-date. We're also seeing steady improvements internationally, as Michele will cover later, and most notably in China, where spending on travel is returning to near pre-COVID levels. Throughout the quarter, we were highly encouraged to see cancellation rates normalize, with our average booking windows lengthening in March, and website bookings surpassing 2019 levels. Consumer confidence is back, hotels are selling out again, and our busy summer season is upon us, with the U.S. Travel Association reporting that nearly 9 out of every 10 Americans surveyed are planning to take a trip. Adjusted EBITDA for the quarter was $97 million, down 11% from 2020, and down only 14% from 2019. Free cash flow generation was equally strong, with adjusted EBITDA converting at 60%. Our operations team opened 7,600 rooms, which was 23% higher than what we opened last year in the first quarter.

Michele Allen, CFO

Thanks, Geoff. Good morning, everyone. I'll begin my remarks today with a detailed review of our first quarter results, followed by an update on our capital allocation strategy and a brief note on our outlook. Throughout my discussion today, I'll provide comparisons not only to the prior year but also to 2019, which we believe are more meaningful as prior year results were already impacted by COVID-related travel restrictions and therefore are of little help in analyzing recent trends and recovery prospects.

Operator, Operator

We'll take our first question today from Joe Greff with JPMorgan. Please go ahead.

Joe Greff, Analyst

Hi, good morning, guys.

Geoff Ballotti, CEO

Good morning, Joe.

Joe Greff, Analyst

My first question is on removal/retention. The churn was better in the first quarter, but is that lower removals a function of progress towards your goal of 96% retention or a function of the timing between quarters in 2021? Are you more favorable about retention and churn relative to three months ago?

Geoff Ballotti, CEO

I think it's both, Joe. Terminations certainly have some seasonality to them, and Q1 is normally our lowest termination period. Yes, we believe that annualizing our Q1 rate we would be at 97%. I think it is getting ahead of ourselves for the full year. That said, we're very happy with the progress we've made in retaining our most valuable franchisees, and it gives us great confidence in getting back to that 95% level. We're not seeing anything out of the ordinary right now; foreclosures are still less than 0.5% to 1% of our system. We're pleased to see the terms improve not just compared to the prior year, but also to 2019 levels. In fact, they were down more to 2019 than they were to the prior year. And to the back part of your question, we've made significant progress over the last few quarters in terms of moving our termination rates. Our teams out there still believe we could do better. We achieved a 96% retention for our major brands, and Super 8 has returned to 2019 levels. We have plenty of brands like Microtel that have retention rates at 97%, or La Quinta, which has been running at 98%. We're focused on getting back to 95% this year and then moving up to 96% over time.

Joe Greff, Analyst

Great, thank you. And then a follow-up question, probably for Michele or anyone, regarding your RevPAR sensitivity. The 1 percentage point is 2.8 million per annum or 700,000 per quarter on average. How does that sensitivity in RevPAR look from Q2 through Q4?

Michele Allen, CFO

Good morning, Joe. I think that it wouldn't be too far different across the quarters. You could pretty much straight line it without significant variance. The third quarter is obviously our largest earnings quarter, but it won't be very meaningful to your overall model.

Joe Greff, Analyst

Got it. And one final question; is the 49 million related to the absence of marketing fund spending? How do you see that allocated through the balance of the year? How much of that was realized in the first quarter?

Michele Allen, CFO

The marketing fund overspent by about $5 million. It was favorable by $5 million year-over-year in the first quarter. So, 5 of the 49 was realized in Q1.

Joe Greff, Analyst

Got it. For the balance of the year, is it relatively even or more heavily weighted to the summer months?

Michele Allen, CFO

Oh, it would not be even at all. It would definitely be more heavily weighted, particularly in Q2 and Q4 for sure.

Joe Greff, Analyst

Got it. Thanks, guys. Good job.

Michele Allen, CFO

Thank you.

Operator, Operator

Our next question is from David Katz with Jefferies. Please go ahead.

David Katz, Analyst

Hi. Good morning, everyone. One of the more prevalent topics for us and the industry is conversions and conversion sales. I'd love more color on the competitiveness of this market and how optimistic you are for it to drive an accelerating NUG going forward.

Geoff Ballotti, CEO

Sure, it's absolutely competitive. You hear all of our peers talking about it on each of their calls, David. We're thrilled to see our conversion activity continue to pick up as we expected, and we talked about it on the last call. Our conversion activity has moved from the mid-70s to over 90% of our room openings domestically, and we've opened more rooms domestically this year than last. Internationally, it moved from the mid-30s to over 50% of our openings. Our international teams are also seeing strong interest from independent hotels, particularly in Asia Pacific and Europe. We've doubled our conversion rooms in China, and higher numbers internationally indicate our value proposition is resonating well. All our teams are very focused on driving these numbers, and we did not cut back on any of our franchise sales teams throughout the pandemic, providing them with more resources and support. Our conversion pipeline grew both domestically and internationally sequentially, indicating great interest domestically in our Travelodge and Days Inn brands, and overseas in Armada and especially our Wyndham brands.

David Katz, Analyst

Alright. Thank you. As a follow-up, Michele, given the strong acceleration, can you provide balanced thoughts on how we should model for the back half of the year?

Michele Allen, CFO

I'm happy to do that, David. We feel confident in predicting the select-service segment and the trends we're observing. However, there's still a great deal of variability in full-service and international markets, which can be temperamental. While we are encouraged by what we see in China, we want to be more confident in sustaining recovery without further interruption. There's plenty of upside in the back half of the year, but we need to see more consistency in full-service and international performance before committing to that.

David Katz, Analyst

Great. Perfect. Thanks. Congrats.

Michele Allen, CFO

Thank you.

Operator, Operator

Next question is from Patrick Scholes with Truist Securities. Please go ahead.

Patrick Scholes, Analyst

Good morning, everyone. Thank you. Can you provide a bit of color on your expectations for net 1% to 2% unit growth as the year progresses?

Geoff Ballotti, CEO

Sure. With Q1 openings, terms were down, but Q1 openings were 30% higher. We expect to open about 80% of what we opened in 2019, approximately 50,000 rooms. As previously mentioned, our room openings ramped, and we opened roughly 15% of those in the first quarter, indicating positive growth. Retention is currently tracking on or slightly above that 95% we're aiming for. Q1 and Q2 should reflect growth similar to what we've seen in Q1, while international growth should contribute in the second half of the year, particularly in Q3 and Q4.

David Katz, Analyst

Okay, great. Thank you.

Geoff Ballotti, CEO

Thanks.

Operator, Operator

Next question is from Stephen Grambling with Goldman Sachs. Please go ahead.

Stephen Grambling, Analyst

Hey, good morning.

Geoff Ballotti, CEO

Good morning.

Michele Allen, CFO

Good morning, Stephen.

Stephen Grambling, Analyst

Just a follow-up on the 2021 projections and sensitivities. In the last quarter's deck, you had some potential areas of upside that were not related to RevPAR such as license fees, ancillary fees, and bad debt expense. What color can you provide on what will drive the sensitivity of these areas for upside not related to RevPAR?

Michele Allen, CFO

Yes. We have a similar slide in the deck this quarter, Slide 34. For the license fees, I don't see that as a likely upside right now based on the guidance that Travel & Leisure gave for Q2 and their Q1 performance. They would need a significant increase in the second half to exceed the contractual minimum fees we're projecting for the full year. So, we don't see that as material upside for the year. However, we do see potential upside to owned hotels, which we factored into our RevPAR sensitivity. We're pleased with the owned hotels' performance, particularly in the first quarter, and this outlook could improve further depending on recovery progress. Regarding ancillary fees and bad debt, while we have a reasonable forecast, they're slightly outside of our control, and there could be upside based on franchisee behavior.

Stephen Grambling, Analyst

And an unrelated follow-up; before the pandemic, there were several company-specific initiatives you implemented, such as leveraging your relationship with Imparity and your loyalty program. What progress have you made in leveraging these initiatives and how might they position your business for growth beyond just a recovery?

Geoff Ballotti, CEO

Sure, we believe these initiatives have greatly contributed to our share gains this year and position us well for recovery. We've focused on our new customer data platform through our partnership with Imparity, our work with Salesforce to automate franchisee workflows, and our improved mobile booking app, which has been a huge success. Year-to-date bookings are up 50%. Additionally, our efforts in the business travel segment, which have been pivotal for franchisees during the pandemic, have been effective in driving more share. January and February showed substantial improvements in our mid-week rates and occupancies. Our overall business infrastructure is almost flat compared to last year. The logistics business, which includes trucking and transportation, is running 6% ahead of last year. We feel these initiatives are enabling our team to attract new accounts and drive even more business as recovery continues.

Stephen Grambling, Analyst

That's great color. Thanks so much.

Geoff Ballotti, CEO

Thanks.

Operator, Operator

Our next question is from Dany Asad with Bank of America. Please go ahead.

Dany Asad, Analyst

Hi, good morning, everybody. My first question is about recent trends. The sequential acceleration from March to April is significant. Can you assess how much of that is due to calendar shifts, spring breaks, and how sustainable is this RevPAR acceleration as we go further into the year?

Geoff Ballotti, CEO

Thanks for the question, Dany. It had a lot to do with spring break being earlier. Occupancies and rates in states like Florida and resorts are above peak levels. For demand, there is optimism as global anxiety continues to decline and our booking windows and lengths of stay are increasing, suggesting continued pick-up through spring and summer. We’re optimistic about the business travel segment's continued recovery, further helping our hotels.

Dany Asad, Analyst

Got it. On the development side, how is inflation changing new construction unit economics? What are your developers telling you regarding timelines and deliveries?

Geoff Ballotti, CEO

Michele and I have been traveling recently and developers have reported experiencing delays on deliveries, especially in sourcing furniture, fixtures, and equipment. We've all seen reports on rising lumber costs, which contribute to these delays and expense increases. On average, new developments are now expected to take longer, more towards 18 months rather than the previous estimate of 12 months. However, franchisees with cash are still looking for new sites and construction opportunities.

Dany Asad, Analyst

Thank you very much.

Geoff Ballotti, CEO

Thanks, Dany.

Operator, Operator

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

Ian Zaffino, Analyst

Thank you. Can you discuss your conversations with franchisees regarding labor availability, specifically housekeepers? Has this been a headwind to occupancy?

Geoff Ballotti, CEO

It’s a great question, Ian. Labor availability is the number one issue mentioned by many within the industry, as highlighted by the American Hotel and Lodging Association. The hotel industry employs around 10 million people, and there was a struggle before the pandemic to fill a million jobs. It's particularly concerning in urban, group, and full-service destination hotels; we need more housekeepers, front desk workers, and culinary staff. The hotel industry is advocating on different fronts to improve this situation. We hope for alleviation as unemployment insurance programs wind down, which should help ease this labor shortage moving forward.

Ian Zaffino, Analyst

Great. With the potential for an infrastructure bill, what are your thoughts on how that could flow through to different segments, and who will benefit the most?

Geoff Ballotti, CEO

We're excited about any potential infrastructure plan. Our teams are actively looking to find new accounts linked to infrastructure projects. We’re in touch with companies working on targeted projects; these are the customers that stay at our hotels. We're winning more bids and gaining market share, particularly through our Wyndham Direct initiative. Infrastructure and construction represent a sizable portion of our business mix, and we expect this segment to remain strong.

Ian Zaffino, Analyst

Thank you very much.

Geoff Ballotti, CEO

Thank you.

Operator, Operator

Our next question comes from Michael Bellisario with Baird. Please go ahead.

Michael Bellisario, Analyst

Good morning, everyone.

Geoff Ballotti, CEO

Good morning, Mike.

Michael Bellisario, Analyst

I wanted to revisit the Travel & Leisure deal. How do you think it enhances your overall brand platform, and what does it mean for growth and potential long-term financial benefits?

Geoff Ballotti, CEO

We're thrilled with the deal. It’s a brilliant move for Wyndham destinations, providing great opportunities for rebranding. Our Blue Thread sales doubled year-on-year, increasing from 7% to 14%. We're incentivized by these new owner sales and are focused on driving initiatives in collaboration with Travel & Leisure. Their transaction business has also seen positive increases, and we see immense value in our rewards program strengthening further through this partnership. We're highly optimistic about the future.

Michele Allen, CFO

No structural changes to the contract affect the ability to earn the licensee fee.

Michael Bellisario, Analyst

Got it. Understood. Thank you.

Geoff Ballotti, CEO

Thanks, Mike.

Michele Allen, CFO

Thank you.

Operator, Operator

Our final question today comes from Alton Stump with Longbow Research. Please go ahead.

Alton Stump, Analyst

Great, thank you and good morning. I wanted to ask about company-owned hotels; what are the key drivers of their performance and how do you foresee them in the rest of the year?

Michele Allen, CFO

Thank you. Our Puerto Rico hotel benefited from increased air travel, and the island eased many restrictions, resulting in better leisure performance than expected. Once guests arrived, on-property spending in food and beverage outlets led to solid results in the first quarter. In Orlando, the Bonnet Creek Hotel performed well due to higher rates while maintaining leisure business. These hotels typically earn about 75% of their EBITDA in the first half of the year, so there is some upside potential in the back half, but it may be more limited compared to the first half.

Alton Stump, Analyst

Thanks for the details. A follow-up on labor; with unemployment insurance changes ahead, do you think that will ease the labor situation, or will we face labor tightness for the rest of the year?

Geoff Ballotti, CEO

Franchisee expectations suggest it should help when unemployment insurance rolls back in September, but we're unsure what else might come into play with future stimulus.

Alton Stump, Analyst

Got it. Makes sense. Thanks so much.

Geoff Ballotti, CEO

Thanks.

Michele Allen, CFO

Thank you.

Operator, Operator

It appears we have no further questions. I'll return the floor to Geoff Ballotti for any closing remarks.

Geoff Ballotti, CEO

Thank you very much, everyone, for your continued interest in Wyndham Hotels & Resorts. Michele, Matt, and I look forward to talking to you in the weeks ahead, hopefully in person at one of the many industry events we’ll be attending this spring and summer as our industry returns to normal. Enjoy your spring, and we hope you'll be out on the road this summer. Stay healthy and we hope to see you soon.

Operator, Operator

This does conclude today's Wyndham Hotels & Resorts first quarter 2021 earnings conference call. Please disconnect your lines at this time, and have a wonderful day.