Good morning, and welcome to the Hyatt Third Quarter 2023 Earnings Call. All participants are in a listen-only mode. After the speakers' remarks, we will have 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 Adam Rohman, Senior Vice President of Investor Relations and FP&A. Thank you. Please go ahead.

Thank you and welcome to Hyatt's third quarter 2023 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 start, I would like to remind everyone that our comments today will include forward-looking statement under federal securities laws. These statements are subject to numerous risks and uncertainties as described in our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and other SEC filings. These risks could cause our actual results to differ materially from those expressed in or implied by our comments. Forward-looking statement 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 website at hyatt.com under the financial reporting section of our Investor Relations link, and in this morning's earnings release. An archive of the call will be available on our website for 90 days. Please note that unless otherwise stated, references to our occupancy, average daily rate and RevPAR reflects comparable system-wide hotels on a constant currency basis. Additionally, percentage changes disclosed during the call or on a year-over-year basis unless otherwise noted. With that, I will turn the call over to Mark.

Thanks, Adam. Good morning, everyone. And thank you for joining us. First and foremost, I'd like to take a moment to acknowledge the recent global tragedies that have deeply affected communities around the world, including the August wildfires in Maui, September earthquake in Morocco, and October hurricane in Acapulco, Mexico. We've made donations to non-profits on the ground and our Hyatt family has come together to help our impacted colleagues through our Hyatt Care Fund. Additionally, the world was witnessing catastrophic events in Israel and Gaza. While we do not have hotels in the affected region, the Hyatt Hotels Foundation has donated to the International Committee of the Red Cross to support the relief efforts and help those in Israel, Gaza and the impacted region. Our hearts go out to everyone affected by these events, as well as those impacted by the ongoing war in Ukraine. It is in times like these that are purpose to care for people so they can be their best increases in significance. Turning to our results, we reported our third quarter 2023 earnings this morning, including another quarter of record fees for Hyatt. The transformation of our business model and expansion of our asset-light earnings mix is leading to record fee contribution and greater conversion of earnings into free cash flow. Demand for travel remains strong and was something I personally witnessed during a trip to Asia this past August, my first visit to the region since 2019. Visiting key markets like Shanghai, [Indiscernible] Hong Kong and Tokyo proved insightful and inspiring as I was able to connect with many of our colleagues, owners, partners and guests. There's a clear uptick in travel demand in Asia and this momentum, combined with the continued growth and excellence of our food and beverage operations in the…

Thank you, Mark. For the third quarter, Hyatt reported net income of $68 million and diluted earnings per share of $0.63. Adjusted EBITDA was $247 million and net deferrals plus net finance contracts totaled $35 million. Excluding the impact of real estate transactions, a significant termination fee in last year's third quarter, and ALG vacation travel credits, earnings were up 2% this quarter. Adjusted EBITDA and net deferrals fell short of internal expectations, in part due to increased costs in our owned and leased portfolio, and our unlimited Vacation Club operations, which I'll review in a minute. We achieved the historic milestone of $250 million in total management franchise license and other fees, a record breaking quarter, this reflects almost 70% growth from the third quarter of 2019. Properties added to our system over the past six years from our pipeline, conversions and M&A contributed 38% of this quarter's fees. As a result of our expanded fee revenue, our asset light earnings mix was approximately 80% for the quarter, fueled by exceedingly strong fee growth and industry leading net rooms growth. Our legacy Hyatt results had strong growth in the quarter with adjusted EBITDA of $197 million. When adjusted for currency, the net impact of real estate transactions and a significant termination fee last year, results are up 22%. Our management and franchising businesses have benefited from our larger system size and robust RevPAR expansion fueled by strong rates and meaningful occupancy growth. Compared to the third quarter of 2019, base fees were up nearly 30%, franchise fees increased by 67% and the number of hotels earning incentive fees this quarter increased by 23%. This notable growth across all fee revenue streams reinforces the breadth and depth of our successful growth strategy and the global strength of our brands. Our…

Thank you. [Operator Instructions] Our first question comes from Patrick Scholes from Truist Securities. Please go ahead, your line is open.

Hi, good morning.

Good morning.

Mark, given the headlines in various real estate concerns in China and, and possible economic slowdown. Can you give us your latest the views and thoughts on hotel developments for China for you. Thank you.

Sure. Thank you, Patrick. Look, demand in China is extremely strong. And international travel is steadily recovering. I think the first quarter was down 60% to 2019. Second quarter was down 40, third quarter was down something like 19 or 15, something like that mid to high-teens. So we we're seeing a steady increase in international inbound, which is really encouraging. A little surprising to me, actually, because air cover and air schedules are still well below where they were before. But and the relative the relevance of that is that the inbound international travelers are spending more. So there's a lot of demand performance in hotels is really good. We're seeing a very strong continuous pipeline growth, but also new openings for your UrCove, our upper midscale brand. And also other projects being completed and, and under construction. So I feel really good about the short term. Now there is a dichotomy between more private sector developers and those that have state-owned enterprises either backing them or controlling them. There's a big dichotomy there, because those who are private and depend on the debt markets are having a very tough time. The debt contraction, the availability contraction is still with us and will remain with us for some time it's going to take the Chinese government a while to work through the bad bank issue that they've got with Country Garden and Evergrande. But in the foreseeable future, I'm actually optimistic that we're going to be able to maintain both net rooms growth but also pipeline growth.

Okay. Thank you.

Thank you.

Our next question comes from Stephen Grambling from Morgan Stanley. Please go ahead. Your line is open.

Hi, thanks. You gave a lot of puts in takes to the 2024 kind of outlook here. But I think one of the big concerns is just how quickly it seems like some things changed around UVC and to a degree other parts of the business, I'm just wondering if you can one, talk to how to think about UVC specifically in the next year. And he puts and takes there. And then just more broadly, into maybe trying to help level set where you think EBIT down free cash flow should be growing next year relative to the longer term outlook you provided?

Sure, Stephen, I'll start. Some of those, as you say, puts and takes that we provided relative to 2023 and as they relate to the ALG business, are we believe are temporary. The tempering that we've seen in to Cancun had some impact on the ALGV business as well as UVC. And we believe that temporary based on what we're seeing forward-looking into festive period and into the first quarter of next year. And as far as UVC is concerned, we have we -- I related to my prepared remarks, some of the increased costs that we were experiencing, some of those costs are related to the temper demand in Cancun, which again, we believe is temporary and will pick up and the member benefit expenses, these are actually as I noted, a really great sign because when as members use their benefits, and they're using them at higher rates, because we're generating higher rates, those are a bit more incremental costs that the club is paying to owners and owners are seeing more profit and, and Hyatt is seeing more fees as a result of that. But what I would say is that we have the ability and the flexibility to adjust our pricing. And so as we consider what those benefits cost and the rates that some of those needs to be paid at because of current strength and demand and to our hotels that allows us to be able to adjust pricing. So as we look forward, we see these items is temporary and have a lot of confidence into next year. One thing I would mention too, is if you look at the overall ALG performance last year, we generated EBITDA plus net deferrals plus net finance contracts of $388 million. And that included a $27 million adjustment for travel credits, which we've gone through before that was primarily in the fourth quarter of last year and a little bit in third quarter a little bit of a headwind in the third quarter. What our guidance suggests for 2023, that if you exclude those travel credits, we expect the ALG business to be flat to last year overall, which is just a great outcome considering the very strong demand that we saw in 2022. And the health of the business remains strong. As Mark mentioned, the multiple that we expect to achieve this year is 7.5 times and that is reflective of the the flat to last year excluding the credits that I just reviewed.

Yeah, the only other thing I would add, Stephen, is that the departures basis business for ALGV which is a much broader or vacations business, much broader set of hotels covered and so forth, was off -- was actually up 20% in, close to 20% in the first quarter down 1% in the second quarter down 10% in the third quarter. Not unexpected, exactly what we expected to see now. What we didn't know and didn't really appreciate is that a disproportionate number of those departures that were affected are for four-star hotels, not five-star hotels. And that's a consequence -- so that actually explains why our ALG our HIC Hyatt Inclusive Collection hotels have gained significant market share because we've been able to maintain and grow our overall results. ALGV's departures have been off more -- dominated more by four-star weakness year-over-year than five-star. And I just want to reiterate what Joan said, between, everyone was speculating that last year was a blow off period and an all time peak high for leisure travel especially into Caribbean and Mexico and so forth, just not true. To be flat year-over-year is phenomenal with some of the rotation out of Cancun and with a huge FX headwind, it's quite remarkable, actually. And I think that with travel patterns more normalizing, and I think that our first quarter pace demonstrates that they are at Cancun remains a very attractive destination, we're going -- our expectation is we're going to continue to grow from here and remain very, very strong. So I think we have a lot to point to that. That's fact based. That really gives us Trent tremendous confidence heading into next year.

That's helpful. And if I could see one, one more in. You did call out some higher expenses. I think in the Americas segment, it looked like the allocated expenses jumped up a little bit. Is there anything that you could provide in terms of quantifying what happened there and how we should think about flow through in some of these fee segments going forward?

Stephen, about half of those were one time and timing related so that that's not an ongoing expense base. We also had some incremental resources for Dream Hotel Group acquisition that are embedded within the Americas.

Perfect, thank you.

Thank you.

Our next question comes from Joe Greff from JPMorgan. Please go ahead. Your line is open.

Good morning, guys. Just maybe a quick clarification, or maybe you can expand on your comments on ALG. Obviously, Mark your comments about you know, ending this year, with a purchase price multiple of a little bit more than 7.5 implies, $350 million or $360 million of adjusted economic EBITDA, when you look at that run rate this year, do you think that is a relatively normalized level, or do you think the first half of this year that's embedded in that syringe into the $160 million range includes some other things that might be one time or the benefits of a really robust growth? Or do you think the 350 to 360 has to be cut down to think of a normalized year from which you can grow over the next two to three years?

I think of it is a great baseline from which we can grow. And there are a couple of reasons. One, yes, it's possible that the first quarter, quote, blow off period, if you will, the huge increase year-over-year was more to do with the 2022 volumes than it had to do with massively outside 2023 volumes. By the way, our case of plus 12 into Cancun is just absolutely proof positive that that's true. Second, we have already experienced tremendous headwinds of the rotation away from Cancun, which really took hold in the second half of the year. And, and that's going to be I think, that's going to be returning and adjusting back to a more normalized sort of total demand level and departures into the Cancun market. By the way, my confidence in that is buttress by a further increase in airline schedules, which we just learned about two days ago into Cancun. We were already up, I think, in the mid-teens, and they pushed it further. So they're more scheduled carrier flights into Cancun into the first quarter of next year than we previously expected. That's proved positive, because the airlines get to move their aircraft around wherever there's demand. So that tells you something about the demand level. Third 2023 is the massive ramp year for Europe. We struggled in 2022, to catch up to what turned out to be a very compressed level of demand. Our results in 2023 are fantastic. I think our third quarter was up 20% in RevPAR over year-over-year in Europe. Our five star properties which were really lagging badly, in '22, have really caught on and we are seeing continuous demand. Now, yes, Europe is much smaller as a earnings contributor. But we're just getting started here. We're nowhere near run rate in Europe for our five-star properties our four-star properties have held up very well. And we're expanding in Europe. So I think that when you put all those things together, our confidence is extremely high because we've got facts, data and pace, not to mention a trendline with respect to Europe that all point one direction. So I think you can rest assured that this level of earnings is baseline from which we intend to grow next year in the year after.

Great, thank you Mark.

Thank you.

Our next question comes from Chad Beynon from Macquarie. Please go ahead, your line is open.

Good morning. Thanks for taking my question. Wanting to zone in on the Luxury Portfolio, it looks like a lot of the RevPAR growth in the quarter continues to come from occupancy ADRs, it looks like it's becoming a little bit harder to push higher, maybe save kind of what you did at Park Hyatt. But just wanted to ask about some elasticity on pricing in the mature markets, maybe absent China, if you're starting to see some pushback, or do you still have the ability to raise pricing, given the wealth effect and how strong that leisure traveler is towards your luxury properties? Thanks.

Excuse me. Thank you, Chad. I would say we do feel very good about the pricing capacity that we have. And that remains. I think that when we think about the progression, Asia has had a disproportionate effect on our reported results for our -- when you look at it by brand, leisure demand remains very high. So I think what we're going to see is a tailwind from increased international travel into China. We're going to see continued leisure demand. I know that I think rumors of the decline of leisure have been greatly exaggerated. And we are seeing strength across the board. And we are also have a -- we have a sharper focus on how we go to market for luxury hotels. And we're seeing through our consortium partners, a lot of high-end travel advisors, some very encouraging signs with respect to level of travel next year, which implies demand, which implies pricing power. So we feel very good about it. Luxury ADR right now is running at about 25% 26% above 2019 levels. And so that is quite strong. And I think it's not only going to be maintained, but will improve. And of that it's plus 30% in the Americas. So I think what we're going to start to see is that the enhancements over 2019. So I think what we're going to start to see is an enhancement of those ADR comparisons to 2019 as we go into '24.

Okay, great. In terms of group, you said it's pacing 8% up 8% for 24. What percentage of '24 is kind of on the books right now? And then just in terms of the mix between group BT and leisure, should this look drastically different in '24 versus '23? Or should it be similar? Thanks.

So the first question, I think we've got a bit over 70% of the business books isn't next year. So which is about where we would typically be at this time. Notably, the bookings what's on the books right now is reflecting equal measures of improvement of growth in corporate actually corporate, the highest then association, then regional and specialty groups. But they're all strong, and it's balanced. So we're not, we're not sort of writing a single customer base to have confidence in our group pacing into next year, it's quite well spread. Associations, as we've been predicting, are building in date ranges and pattern stay patterns that guarantee them what they need, that's compressing inventory. At the same time, what we've got looking forward with respect to business transient and group is a continued blurring of the line between what means group and what means business transient. Some of the use cases have continued to move from what we used to call business transient into what we would call group which is 10 or more rooms and a room block. So I would say the fact that we are now recovered on the business transient side by 90%. I think we just built from here, but also continue, my own take is that group will continue to lead this from a corporate travel perspective. I think I've been saying this for a long time. But if I look at the total commercial base, commercial base of customers, that's whether you want to call it business transient or group in corporate that total demand level is going to be higher and grow from -- grow over time from 2019 levels. And I think all the data that we've seen year to date proves that to be true.

Yeah. The only thing I would add to that is Mark mentioned the strong, really strong production we saw in Q3, which was over an excellent Q2. And as we look out beyond, you know, these bookings out beyond 2024, are in the over 7%, range, base range. And a lot of that about half of that is driven by rates. So we're still yielding really strong rates on the group side, and really strong demand even further out. So as the windows look further out, we have even more enhanced ability to yield rates on that group. And then also, the more near term business as we get into future quarters. So it's all really, really great sign for group business into the future.

Great, thanks. Appreciate it.

Our next question comes from Richard Clarke from Bernstein. Please go ahead. Your line is open.

Hi, good morning. Thanks for my questions. I just wanted to ask a couple of questions about the property disposals. Given you've signed the purchase and sale agreement, are you in a position to tell us any more about what that property is? Maybe what the multiple might be? And you haven't changed the capital return guidance. Could it happen early enough this quarter, to increase the capital return guidance? And then if I can think about a follow up, I just want to how you thinking about future disposals, you've said you're confident in this program. Will you announce further tranches at some point or will it move to more of an ad hoc disposal program beyond this $2 million tranche?

Thank you, Richard. We're not going to really go into the details of individual property transactions until we've closed that's our practice. And that is by virtue of the fact that to quote a famous yankee, Yogi Berra it ain't over till it's over. So but we have high confidence given that we have a definitive purchase and sale agreement sign with a very known and credible counterparty. And we also have the LOI for the other asset, again, with a very known and capable counterparty with whom we've done many deals in the past. So we have, by virtue of the sort of qualitative aspects of who we're dealing with and how the deal processes have gone, we feel really good about those. And as your question about whether that could affect return of capital to shareholders, our priorities remain the same, which is, first and foremost, we want to we want to invest in the business. I think we've proven that we've created tremendous shareholder value through a number of investments that we have made in the past. And we will continue to look for those but absent a predictable or a foreseeable need for cash, we will continue to return capital to shareholders. In terms of the programmatic aspect of our disposition program, our practice in the past has been to complete our commitments and then provide some glide path with respect to the next phase and we expect to do the same after we complete the current commitment.

Thanks very much.

Our next question comes Duane Pfennigwerth from Evercore ISI. Please go ahead, your line is open.

Hey, thanks, not to harp on the LOIs, but can you just speak just high level to the capital structure change and the EBITDA loss that you would expect from these transactions and relatedly, how much of a tailwind on lower CapEx with this represent into next year?

Again, I think we will, we will do two things one reiterate what we said before, which is that we expect to complete the program with a multiple range of somewhere between 13 and 15 times and that is where we remain we're confident in that. And secondly, we will provide obviously, specific data on individual transactions with respect to both EBITDA and PAT and CapEx when we announce -- when we have fully fully closed transaction. So yes, we will provide that. We're just not going to provide it today.

Yep, sorry. Sorry to make you to repeat that. And then I guess just you would love your perspective high level this this idea that like high end leisure travelers tilted all their spend International after having had limited options to travel long haul since pre-COVID. Pent up demand for Europe a pent up demand for international, how do you think that evolves into 2024? Do you see that trend continuing more of the same? Or does domestic leisure battle back next year in your view?

Yeah, I think the fact is that, part of what we, the reason we had such great confidence through COVID, that we were going to fully recover is that travel is an essential human need, human connectivity, and so forth so is discovery. So I think it's not surprising at all that when able to. People decided to branch out and go and either visit again or visit for the first time. Other destinations Cancun was the goto market during, during COVID. So it was not surprising that we saw a broadening of destinations, Cancun remains remarkable, and the Caribbean remains a remarkable and great destination. And so our confidence that it's going to remain a really, really attractive place to be, is extremely high. The quality level of the experiences continues to rise, I would say, thanks in large part to what we're doing with our luxury and five-star properties. The bar has gone up a lot. And I think as more and more of our members are rolled, the five members are experiencing that they're coming back and booking into the future. So we're really encouraged by all of that. It has also benefited our European hotels. I think ALGV, which books across many brands, but their departures to Europe are up over 100% year-over-year. Now Europe is not a particularly large base of business for them. But it's notable that it's doubled, year-over-year is just another signal that that there's more activity outbound. So I think that the domestic, the domestic destinations, U.S. destinations, and Mexico and the Caribbean, are going to actually benefit from the same desire to branch out and expand Brett -- from places like Europe. Our European base last year was down significantly, and or this year, and improved over the course of this year was down last year. But I think it's going to improve over the course of this coming year. So there's a balance across the globe. And I think leisure demand in total, remains really strong.

Yeah, I would just add a couple of data points, we went through the pace that we're seeing into Cancun for festive in the first quarter. As far as our legacy properties. And that is, -- in the U.S. and primarily the U.S. consumer, our legacy non-resort leisure properties are looking at a effective pace of about 20%. And our resort hotels into the first quarter are also looking at pace of about 20%. So the health of the U.S. consumer into our U.S. leisure and resort destinations is extremely strong so we can continue to see that strength as Mark mentioned. And customers really -- our customer base really prioritizing leisure travel.

Thank you.

Our next question comes from Connor Cunningham from Melius research, please go ahead. Your line is open.

Hi, everyone. Thank you. Just on distribution. You've talked about significant growth in the loyalty program. I'm just curious on how that's translated to direct distribution. We've heard a lot of travel companies talk about loyalty program growth, but there hasn't been a material change and just distribution in general. Is there a maturation period as you sign up new people before they start to book more direct than they have in the past just curious. Thank you.

Yeah, I think there are two, thank you for the question, Conor. There are two dimensions to this the first is loyalty program. And yes, there is a ramping period, if you will, a maturation as you described it that will occur. Our penetration, world of high penetration has grown 100 basis points year-over-year. Think we're well above 40 at this point into the low to mid 40s In terms of total penetration, which is something like 800 or 1,000 basis points over the last several years. So we've continued to see that growth. And the second dimension is the improvement of the other digital resources. We have re skinned if you will and re-enabled our Hyatt.com presents for all of our functionality, website functionality, site functionality for all of our hotel brands. The program is rolling out by brand at this point and our app, and our, our web page our.com our brand.com Page won a lot of accolades and recognition recently as being best in class with respect to travel and leisure businesses. So we've invested a lot. We're not done with the application of the, the rollout of the capabilities, but that's actually improving, things like conversion, our drop rates have declined, we actually have hard data to show that the changes that we made are having a commercial impact. Our total direct is in the range of 70%. And if you look at, the accepted wisdom, if you will, is sighs was everything. But one of our biggest competitors is it's 75. So if we can be at 70. If we're within 500 basis points of one of the biggest, if not the biggest leisure company, or sorry, hospitality company in the world, it just proves that you can do it differently and be equally effective. And so we have every expectation that we're going to see growth in penetration and growth and direct channel over time. And I think one of the other dynamics is that we have continued to pay special attention to our travel advisors. We are using them differentially in our luxury division to make sure that we have real focus on the very highest rated guests. So those are those are a few data points for you to go on.

Appreciate the thoughts. I'll keep it in mind. Thank you.

Our last question today will come from Smedes Rose from Citi. Please go ahead. Your line is open.

Hi, thanks for squeezing me in. And I just wanted to ask you, you mentioned higher than expected labor costs in the third quarter. I think it's an open portfolio and I just wondering how you're thinking about the pace of wage and benefit increases into next year. And then Mark, you mentioned the royalty penetration increased 100 pips year-over-year. And I just wondering where to where did that stand in the quarter as a percent of occupancy.

So Smedes, maybe I'll just take on the own labor cost. Yes, we have seen incremental labor costs over the past really past 18 months, varying by market. And, the impact to the own portfolio that I reviewed, and went through as far as what our compounded growth rate has been, we are really proud of how our teams have been managing those costs and productivity to the productivity at strong levels in relation to what we're seeing on the wage inflation side. Just add a little bit more color as far as the labor costs, what we what we saw in the own portfolio, is we saw a very high increase in volume. So if you look at the total revenue base, compared to RevPAR, our non-room revenue, our food and beverage revenue grew by twice as much as RevPAR. So that's a lot of incremental volume into our outlets and into our banquet services. And also our occupancy as a percentage of our RevPAR growth in the own portfolio was significant as well. So that incremental volume leads to incremental labor needs. And frankly, it gives us an opportunity as we look forward to manage the productivity as we have been doing. So we will continue to focus our efforts there that seems to be doing a great job. But as we return to 2019 demand levels in those hotels, we have opportunities to continue to focus on the productivity side. And I would just reiterate that our 100 to 300 basis point expectation relative to 2019 stands we're up over 500 basis points in the quarter. And we expect to end up in the full year well at the high end of the range of our expectation to 2019.

And with respect to the world of high penetration, we're in the mid-40s about 45% penetration at this point.

Thank you, guys. Appreciate it.

This concludes today's conference call. Thank you for participating and have a wonderful day. You may all disconnect.