Good morning. And welcome to the Hyatt Fourth Quarter and Full Year 2022 Earnings Call. After the speakers’ remarks, we will conduct a question-and-answer session [Operator Instructions]. 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.

Thank you, and good morning, everyone. Thank you for joining us for Hyatt's fourth quarter and full year 2022 earnings conference call. Joining me on today's call are Mark Hoplamazian, Hyatt's President and Chief Executive Officer; and Joan Bottarini, Hyatt's Chief Financial Officer. Before we get started, I would 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 files. 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 today, 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 Web site at Hyatt.com under the Financial Reporting section of our Investor Relations link and in this morning's earnings release. An archive of this call will be available on our Web site for 90 days. And with that, I'll turn the call over to Mark.

Thank you, Noah. Good morning, everyone, and welcome to Hyatt's fourth quarter and full year 2022 earnings call. I'd like to begin today by thanking all 189,000 members of our Hyatt family for their remarkable contributions to a truly transformative year. We successfully navigated a rapid RevPAR recovery that was unlike anything we've previously experienced. We've successfully integrated Apple Leisure Group and made meaningful progress toward our asset disposition commitment. We also led the industry in organic growth for the sixth consecutive year. These achievements are a direct result of the extraordinary efforts and thoughtful execution by our Hyatt family members, and I'm honored to lead such an outstanding team who is guided by our purpose to care for people so they can be their best. Our financial results also reflect the considerable achievements of our team. We concluded the year with another record breaking quarter, bringing our full year adjusted EBITDA to $908 million plus $94 million of net deferrals and $63 million of net finance contracts, with the sum of these three numbers more than 40% above the adjusted EBITDA we generated in 2019. The record level of earnings and free cash flow that we achieved in 2022 is primarily the result of successfully executing on two key elements of our strategy, optimizing capital deployment and investing in new growth platforms. This strategy was first outlined approximately five years ago and included a commitment to realize proceeds from the sale of owned real estate assets and prioritize the reinvestment of those proceeds into asset light growth platforms to accelerate our fee based earnings, broaden our portfolio and enhance guest connectivity to Hyatt. The execution of this strategy has been nothing short of remarkable. Over the past five years, we realized proceeds of approximately $3.8 billion from the sale…

Thanks, Mark, and good morning, everyone. My commentary today will cover key drivers of our performance, including our strong cash flow, a review of 2022 capital allocation highlights and expectations I can share for 2023. This morning, we reported fourth quarter net income attributable to Hyatt of $294 million and diluted earnings per share of $2.69. I will review the nature of the tax adjustment we recorded in the quarter, which significantly benefited our net income shortly. But first, I'd like to cover our performance this quarter. As Mark mentioned, this was a record fourth quarter with adjusted EBITDA of $232 million, net deferrals of $28 million and net finance contracts of $15 million. The fourth quarter completed a transformative year for Hyatt, and as a result, we generated a record level of fees in the quarter with total management franchise, license and other fees of $226 million, an increase of 40% from the fourth quarter of 2019, driven by the continued success of our asset light transformation. It's notable that properties that have joined our system in the last five years, including 2 Roads and ALG contributed 34% of our total fees in the quarter. Turning to our legacy Hyatt results. Adjusted EBITDA was $189 million for the quarter, which is approximately 12% higher than 2019, adjusted for currency and the net impact of transactions. Our management and franchising business has benefited from our larger system size and more fully recovered RevPAR environment. As Mark mentioned, system wide RevPAR was 2.4% above 2019 or up 6.6% when excluding Greater China, powered by strong rates with leisure transient average rate up 19% and group average rate up 15% compared to 2019 levels. Additionally, our owned and leased segment generated $88 million in adjusted EBITDA for the quarter, down 11% to…

[Operator Instructions] Our first question comes from Patrick Scholes from Truist Securities.

I’mm getting a number of questions from investors about -- and again, I don't mean to sound accusatory here. A number of your peers have given either EPS and/or EBITDA guidance. Curious as to what's holding new folks back from providing similar.

Well, Patrick, I'll start by giving you a sense of how the RevPAR guidance that we’ve provided will track human expectation for 2023. So if you think about the $1.65 billion that we generated in adjusted EBITDA, net deferrals and net demand contracts and then you remove from that the onetime items that I noted in my prepared remarks, you land at a baseline of about $1 billion. And we continue to find that the EBITDA sensitivity that we've been -- that we shared with you in 2019 have continued to hold true at a point of RevPAR growth will lead to about $10 million to $15 million in EBITDA on the legacy Hyatt business. So if you take the midpoint of our RevPAR range and apply that sensitivity, you'll get to -- you'll be able to model what to expect for 2023. I just want to make a couple of comments with respect to ALG. So as you think about that business and how well, exceptionally well, it performed in 2022, on all cylinders. We said all-time highs in that package RevPAR and the pricing associated with our membership club sales and also our package prices for ALG. As we look at this year, we look at net package RevPAR, we expect directionally similar dynamic between the first half and the second half. And a lot of that is driven by the business and the easier comps, if you will, in the first quarter and going into the second quarter. And the second half of the year will also have a moderated RevPAR -- net package RevPAR growth rate. Finally, for vacations, vacations business. You might recall that in our second quarter earnings release last year, we noted that there's a seasonally adjusted activity level for vacations, typically in…

I would just add two quick things, Patrick. First, given booking windows, which are extending, but still relatively short, we felt like we would gain a lot more visibility as we pass through first quarter and that's going to be by comparison to last year, a massive quarter. We're seeing really solid pace, both for resorts, ALG up 30 US -- I mean legacy Hyatt resorts bookings in January were plus 20%. So leisure is showing no signs of slowdown whatsoever. Group, I mentioned plus 21% pace into the year. We feel really strongly about that. We had pickup last year that was with -- in excess of booked rooms on a consistent basis. None of that is included in that base number. And that includes some real weakness later in the year that we are currently observing and seeing what we can do to ameliorate really in three key cities: Chicago, Atlanta and New Orleans, they just have really weak citywide patterns. But even with that, we're showing really good pace because it's inclusive of that. The final thing is, we are -- embedded the backdrop to all of this is a slowing in the second half with respect to relative macroeconomic conditions. So I think our sentiment is we see spreads, credit spreads compressing, but rates remaining relatively higher for the time being. We have these dynamics, which are showing great signs of strength across our business lines, including business transient, by the way. But we feel like we'll have dramatically better visibility post Q1 into Q2.

That's a great color there, a lot to digest. Just a quick follow-up question on the Hyatt Irvine. Would you consider that hotel sort of a temporary ownership until it's sort of up and running and stabilized and that would be something you'd consider selling with a long term franchise or management contract?

Yes, that's the intention. That's -- when we underwrote the acquisition itself, first of all, we took full account of the renovation program that we're now executing against. And our intention is that as soon as we demonstrate what we think is going to be extraordinary demand that we can pull into that hotel, we will take it to market.

Our next question comes from Stephen Grambling from Morgan Stanley.

From a strategic standpoint, you completed a number of acquisitions, moving asset light. Are we in digestion mode at this point, are there still other areas that you would say you want to fill? And given some of your peers have made a bigger push down chain scales and really even doubled down, in some cases, on limited service and more franchise agreements. How are you thinking about franchise mix and limited service as a potential area of growth longer term?

A couple of things. First, our integration process with ALG has gone extraordinarily well. the cultural alignment of the two companies has allowed us to move very quickly. There are only a couple of areas -- we largely accomplished everything that we set out to accomplish in 2022, there's some carryover items, mostly in the area of finalizing some cyber and control environment topics. We feel really good about where we stand, but we want to do some additional work in those areas, plus a lot of what we are spending in 2023 is actually enhancements of capabilities, specifically in digital. So the number one investment in the integration spend in 2023 has to do with digital investment in improving the World of Hyatt experience for those World of Hyatt members staying at ALG properties, which is highly relevant because we launched World of Hyatt in May, we ended the year at a 17% room penetration for World of Hyatt members, which is extraordinary in a short space of time, and we signed up over 315,000 new World of Hyatt members at ALG properties. So the World of Hyatt production for ALG properties is on a great ascendancy and we're just getting going. So enhancing that and actually leaning into that further will allow us to improve distribution mix and lower distribution costs. So I'm just giving you some color on kind of where we stand on that integration process. Dream is brand new to us. We brought over a significant measure of resources, meaning people and capabilities, they have an extraordinary team, especially in food and beverage planning and programming and nightlife and entertainment. And those are areas that we have existing -- well, we don't have any resources in the entertainment and nightlife piece, they do, and we're…

And maybe as a quick follow-up. The puts and takes that were outlined on the guidance seemed to get to, call it, a $1.2 billion EBITDA range, which would mean that you're closer 2 turns of net debt-to-EBITDA versus peers more like 3 turns or above. Is that the right math and how are you thinking about the right leverage level in this rate environment and as you move asset light down the line?

I would say, Stephen, that we are making great progress and in part due to the great performance, our great EBITDA performance and we've said on a growth basis that we're targeting about 3% to 3.5%. So there's different measurements for that leverage ratios that we're managing with our investment grade profile. So that is our commitment. And as we generate more cash flow, we'll have more investments to be able to make decisions about how to invest back into the business and return capital to shareholders when appropriate.

I would just add, we talk about mix, earnings mix, and we talk about free cash flow. Just pay attention to the fact that 100% of reported adjusted EBITDA plus net deferrals plus finance contracts from ALG converts to cash. So the cash conversion effectively is 100%. There maybe timing differences to working capital that carries over, but working capital is net zero over the course of any 12 month period. Secondly, our cash conversion is a net cash flow from legacy Hyatt is rising. Our franchise proportion is increasing. We're increasing our franchise base in Europe, in particular, and finding more and more opportunities on franchising in some other markets, notably South America. So I believe that you'll see a growth in our franchise percentage over time. We still are dominantly a managed business but I think franchise will be a grower. And secondly -- and thirdly, rather, the CapEx carry for the portfolio is coming down and will continue to come down. So I think those are the key drivers to having great confidence that our cash position and cash generation has really been transformed already.

Our next question comes from Joe Greff from JPMorgan.

Two comments on how you're thinking about 2023. One, would you expect ALG to grow adjusted economic EBITDA year-over-year, given the onetime benefit of $27 million from the travel credit expirations?

I think the short answer is no, because there is -- that was a release of a liability. While it didn't have a cash impact, it was a reduction in the liabilities that we took on when we bought the company. So from a valuation perspective, it is relevant that that got released because they lapsed. A lot of the settlement with travelers who had books holidays that were not able to be taken because of COVID were settled in travel credit. These travel credits actually expired. So that's actually what gave rise to that. But when we bought the company, we were not just familiar with it, we took into account in the liabilities that we assumed. So effectively, we took on the liability that turned out to be -- have no costs associated with it. So while it wasn't a cash benefit in the reported earnings, this is a GAAP geography issue. It was a pickup in sort of valuation, so to speak. But no, that's a one-timer. Secondly, right now, we are assuming that the seasonality issues that Joan mentioned earlier will not look like they did in '22, because it was exceptional that we filled in. And so we are basically expecting that we will return to a more normal seasonality effect. So for those reasons, I would say, no, we wouldn't expect growth from the 22% level. Having said that, three things are true. First, the package RevPAR in January was up 42%, well ahead of our expectations, pacing for ALG is plus 30% for the year. Again, ahead of our expectations. And third, we're growing, we're adding properties. So I think that there are offsets to some of the structural things that we're expecting to impact ALG's business. So I would say stay tuned. Right now, if things remain as robust as they started, we will be wrong about being able to grow from where we were in '22. But it's really too early to say. The booking window is less than 60 days or it's about 60 days, I should say. So I would just say stay tuned, we're going to be tracking this extremely closely.

And then finally, could you break down the rooms growth between ALG and Hyatt's non ALG portfolio for '23, the delta in '23.

In '23, I think the growth is -- ALG is up 12%. Is that right? Okay. So I think ALG will outpace legacy Hyatt growth. The reason why we were debating that here is because we do have assumptions with respect to conversions. Conversions last year represented about 35% of our total growth. I think that the key thing to note, Joe, is that the entirety of the construction profile across the hotels that have been under construction, we have close to 40% of our pipeline under construction has shifted right. We had over 8,400 rooms that we thought we were going to open. This year, they got pushed into '23. But concurrently, we are taking the view that we will have a significant number that gets pushed into '24 as well. So it's almost like the entirety of the construction profile has shifted right. And what's making up the difference right now is, first of all, ALG properties are not subject to the same dynamics because of the markets in which they're being constructed. So we have more durable and more higher visibility to the openings actually and construction being completed on time. So the biggest area where that dynamic is true is China. Things got shifted out to the right significantly and we'll stay shifted to the right until probably sometime in '24, because it's going to take the real estate sector time to catch up. So that's been a dynamic that's just a reality that we're living with, that's not a long term brand health or growth issue. It's a short term dynamic with respect to the construction profile of what we're dealing with. But we did have significant conversions in '22. We expect to have a fair number of conversions in '23 as well, higher than our historic 20% to 25% levels, maybe not as tight as the 35% we posted in '22, but significant. And so meanwhile, I think the number of opportunities that we're seeing with respect to ALG growth do include some portfolio transactions on which we're working. So therein lies the relatively higher growth rate for ALG relative to legacy Hyatt.

Our next question comes from Shaun Kelley from Bank of America.

I was hoping we could get a little bit more color maybe on the owned and leased margins. You've done a great job us kind of bridge with some of the asset sales. I believe you mentioned in the fourth quarter, margins on a comp basis, still up about 330 basis points year over -- versus 2019. As we start to get into a much more normalized environment, inflation having been a real cost over a four or five year cumulative period, we're starting to hear hotel owners out there talking a little bit more about those pressures. So kind of what's the expectation for holding on to some of those margin gains for '23 and beyond?

So Shaun, I'd be happy to answer that. The expectation that we have shared consistently is that we expect to be 100 to 300 basis points above pre-COVID levels. And that's really driven by permanent improvements that our teams in the field have made with respect to digital capabilities and a very, very disciplined focus on productivity. So some of that is helping to minimize the wage inflation, wage rate growth that we've seen in the quarter. In the fourth quarter, we had an excellent result of 330 basis points, that's on a comparable basis. You mentioned a change in the portfolio. So that is the same set of properties to 2019. That is helped by rate right now being up about 11%. And we also have a lower mix of SMB as a proportion of total revenue, which is a bit lower on the margin side. But I would just reiterate that we continue to expect that range of 100 to 300 basis points into the future.

And then as my follow-up, maybe a little bit more strategic. Mark, you just talked a lot about some of your expectations for net unit growth by some of the different segments for '23. Just help us think about returning to maybe a little bit of your longer term -- longer term, you've been able to deliver on an organic basis as much as 5% to 7% and pretty much lead the broader kind of high level industry. Any reason you see that we can't get back to those types of levels once the development environment sort of stabilize and improves a little bit, appreciating some of the delays around China today and then probably some in the US as well. But as we get to a little bit more of a more normalized kind of world out there, is there a reason base effect or any other that we can't get back to, let's call it, 5% to 7% in the medium to long term?

There's absolutely no reason why we can't get back there and we expect to. There are a couple of drivers to that. The first is our brand performance continues to grow and improve. We've experienced wonderful market share gains. Urban has been an upside surprise. We're gaining significant share in group -- Urban Group, surprisingly strong and transient. So the transient profile that we realized we ended the fourth quarter -- the fourth quarter was 18% off of 2019 levels. January started off much higher than that, but ended at 17% of the first two weeks of February or 12% of, so we see an improvement in that domain. And concurrent with that, we have volume account activity that will yield high single digit ADR increases. So we are seeing that the mix of our business and the significant expansion of our leisure and lifestyle portfolio is enhancing the value of the World of Hyatt proposition and really driving a much higher penetration. Just for reference point, our Americas full service hotels ended 2022 for the full year at about 50% World of Hyatt penetration. And for the total system wide, we were in excess of 42%. These are really strong numbers, up significantly. So the World of Hyatt program is gaining a lot of traction. We had -- I think I mentioned in the script that we were up to over 36 million members now. Our credit card holder base has increased significantly and the spend rate on that card has increased significantly. So I would tell you that the network effect that we're seeing is going to continue to drive performance, which will continue to drive demand for our brands. So I feel really strongly about all of that, not to mention the fact that we ended the year with an all-time high pipeline of 117,000 rooms. So I not only don't see any reason why we won't get back to those organic growth levels, I'd be shocked if we did.

Our next question comes from Dori Kesten from Wells Fargo.

How do you see the unit growth of AMR over the next few years change your regional exposure? I guess what I'm trying to figure out is that there's greater exposure in Europe. Does that increase your likelihood of more brand acquisitions over there?

So the growth for AMR is pretty balanced right now. The resorts in Europe tend to be somewhat smaller in room count than the ones in the Americas. We have a larger pipeline and rooms in the Americas than we do in Europe. We would like to extend and expand in Europe further, so we are focusing on that. But I don't think it's going to materially shift the mix.

And within your legacy system, can you remind us what the typical difference is in spend for a World of Hyatt guests versus nonloyalty guests, and just how that's changed over time?

So first of all, World of Hyatt members are, in general, paying higher ADRs. And the total spend for World of Hyatt members tends to run mid teens to 20% higher than non-World of Hyatt members, and that's been consistent. We're seeing that same dynamic, by the way, for World of Hyatt members staying at our all-inclusive resource as well. We're just starting. I mean I'm actually extraordinarily encouraged to see 17% roomnight penetration by the end of the year for World of Hyatt members. This is a significant expansion of the number of all-inclusive resorts that we've got. And the World of Hyatt members are discovering that resort experience at a pace, which is remarkable. And so I have increased enthusiasm and confidence that we're going to see a growing level of World of Hyatt engagement and penetration over time.

I may have missed this. But have you said what percentage do you think it could grow to over time?

Well, right now, if you look at our Ziva and Zilara hotels, which don't have the benefit of a captive wholesale platform to our operating platform, which we have called ALG vacations, and they don't have the benefit of a membership program at this point, UVC in our case. We've gotten to over 50% penetration from Hyatt channels into those hotels. That is Hyatt.com, but direct digital, but whether that’s mobile web or app, second, World of Hyatt and third, group business. We had a conversation yesterday with our Head of National sales -- Global Sales rather. And I asked about his outlook with respect to selling group business into the AMR portfolio this year, and he's very enthusiastic about that. So I think the direct channel is going to continue to grow. And our reference point, frankly, is the Ziva and Zilara experience that we've had, where Hyatt represents more than 50% of the traffic into those hotels.

Our last question will come from Smedes Rose from Citigroup.

I just wanted to ask you a little bit more about China. If you could just remind us what percent of your pipeline is now in China and maybe just on the development side, kind of what you're seeing in terms of -- is that starting to kind of rev back up as well as operations overall?

Yes. China is performing in a manner that we would have hoped it would, which is to see a significant snap back once restrictions were lifted. January was a stunning month of performance. And we started -- just to give you a reference point for how extraordinary the volume, instantaneous volume of traffic is. The first weeks of February, we were at higher occupancies in our system in China than we did in the United States. So it has been just an amazing recovery that happened instantaneously. So our outlook for the year was probably quite conservative going into the year, but -- because we expected a slower ramp over the first half. Now it's true that January was benefited tremendously by a massive amount of the year travel, and Lunar New Year was in January, which was just over the holiday period, I think we ran 15% above our prior peak. So there's a lot of demand that was leisure focused and that's typical in what we would expect and that's what we've seen in nothing elsewhere. The business travel is coming back. We see that, first and foremost, in our [Eurco] by Hyatt, which is our upper midscale in dense urban locations where it's mostly business travel, and we're seeing great performance in those brands. In terms of the pipeline, about 40% of the total pipeline is in China. So we have a significant measure of growth ahead of us. We expect to open 24 hotels in China this year, that's even with the construction lags that I referenced earlier, and about two thirds of that -- of the room count that's opening, maybe even higher than that, maybe three quarters is what I would describe as legacy Hyatt brands and the remainder is [Eurco] by Hyatt. So…

This will conclude today's conference call. Thank you for your participation, and have a wonderful day. You may all disconnect.