Hyatt Hotels Earnings Call Nuggets: Group Business and Cash Resources

Hyatt Hotels Corporation (NYSE:H) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Group Business

Gebhard F. Rainer – CFO: We had some RevPAR growth of 7.5% but our owned and leased margins were impacted by a number of non-operating items. These non-operating items which included higher insurance and taxes impacted margins by approximately 200 basis points of which about half is expected to be non-recurring. Excluding these items, margins would have been flat. Our owned margins were also impacted by weaker international markets, and relatively lower group F&B spend as groups continue to be cautious in their spend. So here a note on geography international RevPAR was weak as I mentioned, which resulted in a weaker GOP performance in the portfolio. However, from costs per occupied room management this was flat and was in line with revenue growth. The underlying margin decrease is good property level management for them which was offset by the non-management items. We faced also a tough comparison as margins increased about 180 basis points in the fourth quarter of 2011.

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Mark S. Hoplamazian – President and CEO: If I can just add to that, I think couple of things that we look at over time which is, we forever said that we remain very focused on and disciplined around how we’re actually managing cost at our properties and if you look at costs per occupied room, which is not the only measure that’s relevant but it is A, it is one metric. It’s been flat basically since 2007. So we’ve actually found enough productivity measures and different approaches to providing services to the hotels maintain relatively flat cost per occupied room for full service hotels in the U.S. over that period of time. For our select service hotels, partly by virtue of some shared services initiatives we’ve actually seen a decline over that period of time in cost per occupied room. So the first point I would make is just – the focus remains very high and on the operating side we saw very strong performance at the GOP level is really after you take into account insurance and taxes that we had the problem. The second point that I would make is that given our portfolio, the diversity of regions in which we operate, we will volatility from quarter-to-quarter I think if you just look at the year-over-year comparison we were up 180 basis points in the fourth quarter of ’11 down or flat if you take out the one timers in the fourth quarter of 2012. That pretty much demonstrates that you will see volatility quarter-to-quarter the key for us is over time are we actually continuing to manage well and even with those things that we don’t have direct control over insurance and property taxes or be proactive about seeing what we can do in those areas. And the answer to those questions is yes.

Atish Shah – IR: The next topic is group we received few questions on group business. We’ll ask each one individually, first we have heard from others that the weakest segment is large groups is that the same for you. How is this segment performing?

Gebhard F. Rainer – CFO: As Mark mentioned in the prepared remarks group pace is up 4% for 2013, half coming from rate and half from occupancy. We are seeing strength in the technology, retail and manufacturing sectors and we had the best December in group production since 2007. January is up 7% in bookings, relative to January 2012. The booking window is lengthening slightly, but we still see strong short term bookings. Our production in the fourth quarter saw increases in short term business and longer term business in ’14 and ’15.

Atish Shah – IR: How big of a driver was Hurricane Sandy cancellations on group event revenue and which markets in particular were negatively impacted by Hurricane Sandy?

Gebhard F. Rainer – CFO: The net impact on the earnings was negligible, we had some hotels with cancellations but others were displaced or emergency teams hosted in our hotels.

Atish Shah – IR: Question related to this is what led to low growth in non-room revenue in the U.S.

Mark S. Hoplamazian – President and CEO: This is really related to groups more cost conscience group plan held with lower spend.

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Atish Shah – IR: Our next couple of questions, have to do with our report on EAME revenues. You mentioned that EAME was impacted year-over-year by a bad debt recovery. That increased results in fiscal year 2011. Can you clarify what growth would have been without the bad debt and what was the bad debt recovery related to?

Gebhard F. Rainer – CFO: Growth without bad debt was about half of a decline, so the recovery was approximately $2 million, was related to deferred fees.

Cash Resources

Atish Shah – IR: Moving ahead, we received a few questions with regard to uses of cash, so we’ll start with – could you address your balance sheet significant capacity in under-levered position? Is management and the Board of Directors averse to accelerating shareholder distributions particularly in the form of dividends, why is the dividend not part of the Company’s total return policy given both the Company’s significant – perhaps you could pay one in the Company’s directionally bullish view on the long-term of the business?

Mark S. Hoplamazian – President and CEO: So, we think of our cash resources along with our debt capacity and our asset base really in a context of our focus, on utilizing our capital to grow our business. So, we really focus on making investments for the growth of the company as our first objective. We have made the dual commitments in the past, we have commitments of over $550 million to investments and projects to be funded in the future. So we evaluate our cash base in the context of those commitments in the environment for new potential investments, because we want to maintain flexibility and be able to be opportunistic. In the vein of return of capital we’re always discussing additional ways to return capital to shareholders. We repurchased about $400 million of stock in 2011 and about $135 million of stock in 2012. We will, of course, continue to evaluate our situation in all forms of capital return to shareholders will be considered.

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Atish Shah – IR: Hyatt bought back more stocks than most anticipated in the fourth quarter. It’s a $100 million of good quarter we (run rate) to use and what is management set IRR on use of cash/alternatives?

Mark S. Hoplamazian – President and CEO: Well, in terms of repurchase activity, the answer to that is it’s really circumstantial. So, I don’t know that we can provide something that should be used as a rule with regard to pace of repurchases. It depends on the number of factors. Secondly, with regard to IRRs on investments, I covered a number of – progress on a number of investments that we made over the last several years. The IRR, so to speak, will vary depending on what it is that we’re investing, that is, what’s the form of the investment and in what, what’s the project, what’s the market, what’s the location? The relative risk-weighted returns for investments that we make across our portfolio vary quite a lot depending on what the asset is and where it is. So, there is no single answer to this. It’s not one rate of return that applies. What we really focused on is making sure that we’re deploying capital in projects that are good rates of return on a risk-weighted basis and also relevant and important to us from a strategic perspective in terms of gaining new presence or expanding presence in key markets.

Atish Shah – IR: The last question on use of cash, what capital commitment does Hyatt have beyond 2013 other than Park Hyatt, New York?

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Mark S. Hoplamazian – President and CEO: We’ve got projects underway. If you look at projects that we are funding at the moment I mentioned we had $150 million of investments that we made in non-wholly owned projects. We will continue to make investments in those types of projects as we move forward. Our expectation at this point is that that will be in the range of $100 million to $120 million over the course of this coming year. Those are mostly JV projects that would include beyond those by (the way of) for example which we expect to open later this year. We also have commitments the Park Hyatt New York is the biggest one. We also have the construction projects in Rio de Janeiro and other select service properties that are under developments in the U.S. and in Latin America through JVs.

Atish Shah – IR: We received two questions on unconsolidated joint ventures one was why was the share of joint venture EBITDA down 21% in the fourth quarter and the second one was what was the share of joint venture debt, unconsolidated debt at the end of the year.

Mark S. Hoplamazian – President and CEO: On the first question one third of that relates to sales, two thirds relate to market conditions such as Mumbai and Latin America. And with regards to your second question there is about $550 million or north of $550 million of debt at the end of the year.

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Atish Shah – IR: We received two other questions that are little bit bigger picture in nature. The first question is probably the biggest push back we get on Hyatt both as a company and a stock that it is run like a private company that happens to be public. The perception seems to be that the company is still controlled through the (indiscernible) who run it as they see fit. Can you explain how the volume shares work, what information they have and don’t have access to and when and to what extent they have decision making power at the Company?

Mark S. Hoplamazian – President and CEO: Sure, I’ll try to be brief about this and recognize that there are a number of documents and materials that are filed publically that would better explain the specifics. The first point that I would make is that with regard to Class B shareholders – the Class B shares are the ones with higher voting level, they are owned both by Pritzker family interests, that is in various trusts across a number of Pritzker family groups and also by Goldman Sachs, Capital Partners and Madrone Capital. So the Class B shares are not fully owned by Pritzker shareholders and the Pritzker shareholders are a number of different shareholders, not a single one. The second point that I would make is that we do have two Pritzker family members on our Board of Directors. Tom Pritzker is our Chairman and Penny Pritzker also serves in our Board. We have a 12 portion Board with a majority of independent Directors. There are voting arrangements, voting agreements that are in place, that relate to the Class B shareholders and those voting agreements are actually explained in detail in filings that you can find through the SEC. They essentially provide a voting arrangement under which those shareholders vote in line with the Board of Directors. General principal, of course, in corporate governance is that Board members act in the best interest of all shareholders, not some shareholders. So, in brief, there’s a diversity of shareholders. There are two Pritzkers on our Board. They have the same access to information that other Directors would have. The other family groups don’t have information access other than as shareholders as any public shareholders would have and we have a very capable and excellent Board with a majority of independents on it.

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Atish Shah – IR: With the new CFO in place, what are the key things that you would like to see change in the Company with respect to transparency in reporting investor outreach and guidance, communication. What priorities have shifted and why?

Gebhard F. Rainer – CFO: Well, as I’ve come into this position I have seen an evolution on disclosure in reporting and we will continue to do so. You may have seen in the earnings release today that we’ve added some new schedules there. We’ll continue to focus on SG&A costs and margin improvements and that’s really the change and the focus going forward.

Atish Shah – IR: We’ve received a few questions on our executed contract base or pipeline in openings. Of the 30 hotels we expect to open in 2013 what’s the breakout between owned, managed, international versus U.S.? That’s the first question.

Mark S. Hoplamazian – President and CEO: So with regard to openings this coming year, about half international and half within the U.S. and two-thirds of all the hotels are managed properties.

Atish Shah – IR: A related question, the 30 hotels do you expect to open a gross number, and if it is, what is the net number of openings expected?

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Mark S. Hoplamazian – President and CEO: Well it is a gross number. There are properties that come out of our chain from time to time. My guess is that there isn’t a year that’s gone by that we haven’t had some movement out of the chain for individual properties that relates to different regions. It could be a dispute with an owner or change in ownership of the property, a number of things that come to pass from time to time. So, it’s a regular part of the business. It’s not been a huge number in any particular year, and it’s there is no expectation that we got or loss of properties over the course of this year. So we’re not going to affect the planning on individual property leading the chain over the course of the year.