Wyndham Hotels & Resorts Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 13 speakers on the call.

Operator

Welcome to the Wyndham Hotels and Resorts Third Quarter 2023 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 I would now like to turn the call over to Matt Capusi, Senior Vice President of Investor Relations.

Speaker 1

Thank you, operator. Good morning and thank you for joining us. Conference call, with me today are Steve Holmes, our Chairman Jeff Bellotti, our CEO and Michelle Allen, our CFO. Before we get started, I call, 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.

Speaker 1

These risk factors are discussed in detail in our most recent annual report on Form 10 ks filed with the Securities and Exchange Commission and any subsequent reports filed with the SEC. Call, we will also be referring to a number of non GAAP measures. Corresponding GAAP measures and a reconciliation of non GAAP measures to GAAP metrics call, are provided in our earnings release and investor presentation, which will be available on our Investor Relations website investor. Winnhamhotels.com. We are providing certain measures discussing future impact on a non GAAP basis only call, because without unreasonable efforts, we are unable to provide the comparable GAAP metric.

Speaker 1

In addition, this morning, call, we posted an investor presentation containing information with respect to our Board's rejection of Choice's unsolicited offer. Call, we may continue to provide supplemental information on our website in the future. Accordingly, we encourage investors time, we will monitor our website in addition to our press releases, filings submitted with the SEC and any public conference calls or webcast. With that, I will turn the call over to Steve.

Speaker 2

Thanks, Matt. As all of you are aware, last week Choice Hotels announced that they made unsolicited overtures to acquire our business. With no organic growth, less vibrant loyalty program and virtually no international capabilities in Choice's platform, we are frankly not surprised. Call, our business offers a medicine cabinet full of remedies. Our Board has taken its fiduciary duties very seriously time, we strongly believe that Wyndham's standalone plan multiple levels levers of growth provide a more compelling proposition compared to Choice's offer.

Speaker 2

We have received multiple input from key constituents over the past week providing us with further confidence in our decision to reject the offer. Time, the team will be providing further insight into our decision making rationale after we review our strong Q3 performance. I'll now hand the call over to Jeff.

Speaker 3

Thanks, Steve, and thanks, everyone, for joining us today. We're very pleased to report another strong quarter of operating performance. Time by 1%, our economy brands continued to gain market share, outperforming their competitors by another 100 basis points this quarter, Driven in part by revenue growth from our general infrastructure related business accounts, we grew our system for the 11th consecutive quarter, up 1% sequentially end, 3% year over year on an organic basis, our teams opened over 14,500 new rooms in the 3rd quarter with 5,900 of those rooms opening in the U. S. Year to date through September 30, we've opened over 42,000 600 rooms across 326 hotels, opening more than 1 hotel each and every day.

Speaker 3

Time, we have the highest overall franchisee retention rates in the U. S. Economy segment. Our pipeline grew through the 13th consecutive quarter, call, up 4% sequentially and 12% versus prior year, including 2% sequential growth in the U. S.

Speaker 3

And 16% year over year. Our teams awarded more than 230 contracts call, we are pleased to report that we are in the Q1 of 2019. We are pleased to report that we are in the and an additional 7% of our pipeline now in the higher RevPAR midscale, upscale, upper upscale and luxury segments. Our Owner First philosophy was on full display last month in Anaheim where we held the largest global conference we've ever assembled conference with over 6,000 registered attendees and more than 150 sponsors. The conference provided our franchisees time, we are pleased to announce that we are pleased with our colleagues and learn firsthand how to unlock the power of recent investments we have made in next generation technologies, sales and marketing initiatives and hotel level operating efficiencies, our owners have never been more engaged with our teams and the superior value proposition that our brands today deliver.

Speaker 3

Before Michelle takes us through the financials, we'd like to take a moment to acknowledge our team members. The incredible success of our owner first operating philosophy would not be possible without their unwavering commitment and support. Time, we're thrilled about our most recent ranking at number 8, up from number 11 last year on Newsweek's top 100 most loved workplaces for 2023. We thank all of our team members around the world who put our owners At the very center of everything it is that we do and who remain enthusiastic about the opportunities ahead for us time, we are confident in our ability to deliver the outstanding value day in and day out to our shareholders, our guests and our franchisees. Time, I'll now turn the call over to Michelle.

Speaker 3

Michelle?

Speaker 4

Thanks, Jeff, and good morning, everyone. During the Q3, fee related and other revenues grew 7%, time, reflecting global RevPAR net room growth as well as higher license and ancillary fees and pass through revenues in our marketing reservation and loyalty funds call, due to our global franchisee conference in September, which was held for the first time since 2019. Adjusted EBITDA grew 5%, primarily reflecting higher fee related and other revenue call, as well as marketing fund variability. Marketing fund revenues exceeded expenses by $17,000,000 this quarter versus $12,000,000 a year ago. Call, our adjusted EBITDA margin remained consistent at 83%.

Speaker 4

3rd quarter adjusted diluted EPS improved 8%, reflecting our adjusted EBITDA growth call, as well as benefits from our share repurchase activity and a lower effective tax rate, which were partially offset by higher interest expense. Call, we generated $67,000,000 of free cash flow in the 3rd quarter and $225,000,000 year to date. We remain on track to achieve our goal of converting 50 5 percent of full year adjusted EBITDA to free cash flow, which at the adjusted net income line translates to approximately 100%. Time, we returned $134,000,000 to our shareholders during the Q3 through $105,000,000 of share repurchases and $29,000,000 of common stock dividends. Year to date, we have repurchased 3,800,000 shares of our stock for $270,000,000 We ended the quarter with approximately $710,000,000 in total liquidity time, our net leverage ratio of 3.3x was in the lower half of our target range.

Speaker 4

We are reaffirming our adjusted EBITDA guidance of $654,000,000 to $664,000,000 and raising our adjusted diluted EPS outlook to $3.94 call to $4.08 to reflect our continued strong performance as well as our Q3 share repurchase activity. That concludes our prepared remarks on our Q3 results. Jeff will now walk you through the rationale behind our Board's projection of Choice's unsolicited offer.

Speaker 3

Thanks, Michelle. As Steve referenced in his opening remarks and consistent with its fiduciary responsibility, our Board along with its 3rd party advisors evaluated Choice's proposals. Our Board begins from the premise that as a public company with a well distributed shareholder base, call, we're open to any and to all avenues to create value for our shareholders. Many of these value creation opportunities are driven from organic growth initiatives, some are from inorganic growth initiatives and some are initiated by 3rd parties. Our Board has deep experience and has always provided over time, we will be conducting a detailed review of our major strategic initiatives and opportunities.

Speaker 3

With respect to the offer made by Choice in August, our Board determined for several specific and well substantiated reasons, focusing on both transaction risk time, we expect to continue to be in the best interest of Wyndham's shareholders and rejected the offer. Conference call, we've been consistent with Choice from their initial inbound that our concerns would need to be satisfactorily addressed, something they have not done to date. In our press release last Tuesday, we provided initial rationale and insight into our Board's decision to reject the offer. Time, we will go through greater detail around that decision and walk you through our significant stand alone growth prospects. This morning, we posted an investor presentation to our website and we'll be referencing that throughout this discussion.

Speaker 3

Geysor in the world, but we're also the only public hotel company of scale that is truly asset light, generating significant free cash flow, which allows us flexibility on how we choose to allocate our capital, whether it be for investment in growth initiatives with attractive ROIs call, whether it be returning capital directly to our shareholders. Since our spin off from Wyndham Worldwide, we've undertaken a series of news is outlined on Slide 3 that lay a strong foundation and provide a runway for sustainable organic growth going forward. Initiatives like our Echo Suites by Wyndham brand, the fastest growing brand in the underserved economy extended stay space and one we're expecting outsized economic benefits from in the coming years. Investments we've made in hotel level sales and marketing to grow our share of existing infrastructure bookings and to capture the opportunities just now emerging from the recent infrastructure bill and investments we've made in our Wyndham Rewards loyalty program with over 100 and 5,000,000 members, a program that's been voted the best hotel loyalty program by USA TODAY for 6 consecutive years. We've also capitalized on the significant growth potential outside of the U.

Speaker 3

S. With our direct franchising capabilities now in 95 countries. These growth initiatives and so many others support Wyndham's owner first reputation as the franchisor preference call, our hotel owners in the segments we operate in and our franchisee retention rates have correspondingly improved. Time, while some of the benefits of these actions are already reflected in our financial performance, we believe that there will be an even greater benefit from them call, in the coming years, given the long tail for development, retention and new product innovations, we're confident that these initiatives provide a significant runway call, we are pleased to announce our results for outsized growth and enhanced shareholder value. And with that background on our company, we would now like to detail some facts surrounding the Choice offer.

Speaker 3

While the offer may have had an initial headline of $90 per share, the proposal is currently worth less and may continue to fluctuate in value over time As it includes a significant amount of stock consideration, just last week within a few days of Choice's public announcement, Choice's stock had decreased by over 9% and the implied value of the offer was already $4 lower at $86 per share. Call, and it's important to note that Choice has not offered our shareholders any protection against potential continued downward volatility. Furthermore, the fixed value of the cash portion offered to our shareholders would not be realized until the conclusion of an extended regulatory process, which our advisors estimate could take 12 to 18 months. When we consider all of this, one point is clear. Call, the actual offer is worth materially less to our shareholders if and when they receive it.

Speaker 3

At its core, there are 3 primary reasons why our Board has rejected Choice's offer, which you could find on Slide 4. Call, first, there is asymmetrical risk to Wyndham shareholders associated with an uncertain regulatory timeline and outcome. Without commensurate protections and compensation provided to our shareholders for taking on these risks. 2nd, Choice's proposal does not provide appropriate value for Wyndham's standalone growth prospects and exploits short term volatility in Wyndham's stock price without a consideration of a broader view of Wyndham's trading levels. And third, the consideration mix includes a heavy portion of Choice stock, our Board has concerns over Choice's organic growth prospects and those concerns are exacerbated if the pro form a company will be left with an over levered balance sheet that constrains its capital allocation strategy in a material way, further limiting its growth opportunities.

Speaker 3

We'll delve into each of these points in more detail and we'll start on Slide 6. Upon Choice's initial approach, our Board immediately engaged subject matter experts to assess the proposed combination. Our extensive diligence confirmed that the transaction would be subject to an uncertain prolonged approval process of 12 to 18 months. Time, we are pleased to report that the parties' advisors met on multiple occasions and Choice eventually acknowledged the probability of an extended regulatory review period of at least 12 months. Our business would be uniquely exposed deterioration risk during a long regulatory review period as our business is built on relationships.

Speaker 3

Our franchisees typically sign 10 to 20 year contracts with us. Call, they care very much about who they are doing business with, and we believe we offer a differentiated service through the relationships we had fostered over not years, time, we are pleased to report that over decades, relationships that underpin our new business development activity and our improving franchisee retention rates. As depicted on Slide 9, we open more than 4 50 hotels annually. If this uncertainty were to persist for an extended period of time, some portion of our development and openings may not materialize, which compounds over time. Additionally, developers of our Echo Suites brand have expressed significant reservations about deploying such large sums of capital with a brand steward other than Wyndham, jeopardizing the brand's future.

Speaker 3

Moreover, our considerable momentum in improving franchisee retention rates could also be impacted the longer this drags on as competitors capitalize on franchisee concerns around a potential combination. There are significant business disruption risks that our Board believes have potential for irreparable damage to our business and erosion to Wyndham shareholder value. Call, we've made it clear to Choice from the very outset that we would need creative and appropriately scoped protections to address these asymmetrical risks to Wyndham's shareholders. Choice, however, dismissed our concerns as unfounded. As our advisors reviewed high regulatory risk transaction precedence more broadly, there was a clear theme of buyers compensating sellers with materially higher offer premiums Moving on to our second concern, our Board's strong belief that Choice's offer undervalues Wyndham's standalone growth prospects and the opportunistic nature of the offer, which does not at all stand up well when looking at our share price more holistically.

Speaker 3

As you'll see on Slide 11, their initial offer came at a time when the exchange ratio was the most in their favor over the past 24 months. Time, the premium offer is unacceptable for a change of control transaction with the level of asymmetrical risks that we just discussed. Industry research analysts recognize our strong sustained momentum and overwhelmingly believe Wyndham is undervalued and significant upside is evidenced by their price targets and buy ratings on our stock. Our management team has consistently been able to execute call, our near term goals, while also reinforcing the foundation for long term value creation. As shown on Slide 13, we've delivered organic room growth and beat consensus EPS estimates for 11 consecutive quarters.

Speaker 3

And as we've outlined on Slide 14, we have multiple levers to accelerate net room growth from the current 2% to 4% to 3% to 5%, including building on the success of our new Echo Suites brand, leveraging our best in class international direct franchising capabilities and continuing to enhance our franchisee retention rates, which have already improved 200 basis points since our spin off. Beyond system growth and market driven RevPAR gains, we're pursuing several initiatives that will significantly enhance shareholder value, including those that we've previously discussed with you and others that are taking shape out of the spotlight. Combined, these opportunities set up an achievable path to accelerate organic EBITDA growth to a 7% to 10% compounded annual growth rate through 2026. In addition, the ability to deploy significant incremental capital through excess free cash flow and leverage capacity will amplify earnings growth for our shareholders. Time, we are pursuing the

Speaker 2

first step on this path

Speaker 3

with our 2024 adjusted EBITDA outlook of $690,000,000 to $700,000,000 call, reflecting year over year organic growth of 7% to 8%. This outlook includes only a partial earnings benefit from our initiatives call, with full realization over a longer time horizon and represents our growth potential before capital deployment. In 2024 alone, we estimate our capital allocation capacity at the midpoint of our target leverage range to be between 700 $750,000,000 which translates to approximately $8.50 per share. Time, our proven track record, capabilities and embedded value drivers give our Board confidence that our standalone plan call, we'll deliver superior risk adjusted returns compared to Choice's proposal. Finally, the third concern our Board has is the substantial equity consideration.

Speaker 3

We've consistently made it clear to Choice the stock portion of their offer poses significant risk to our shareholders. Our concerns are focused on several areas and are presented on Slides 18 through 22. We'll first address the recent performance of the core business and financials of Wyndham versus Choice. We highlight these metrics as investors take them into account for helping to understand the appropriate valuations ascribed by the public markets. In the first half of twenty twenty three, Wyndham grew net rooms 3% organically, whereas Choice's system declined 2% organically.

Speaker 3

Wyndham grew first half twenty twenty three EBITDA 9% organically, call, while Choice's organic EBITDA growth was 1%. Choice's future growth prospects call, are equally challenged given their declining pipeline as shown on Slide 19. In particular, their revenue intense pipeline has declined 38% between year end 2019 year end 2022. And while that level of detail is not available on an interim basis, we can see that their total pipeline is contracted by 12% year to date call, these adverse movements raise serious concerns for our Board around Choice's ability to organically grow their system, along with their ability to execute their stated revenue intense strategy, Choice's multiple premium historically benefited from organic growth, however, its more recent performance, including 7 consecutive quarters of negative organic growth combined with its declining pipeline, have reduced that premium as depicted on Slide 20 and make it susceptible to further valuation multiple contraction time, we are pleased to report that we are in the future. This challenging growth profile will only be exacerbated should Choice be required to operate within the proposed successive leverage profile that this transaction would require, prudent leverage and balance sheet flexibility are core tenants of how Wyndham operates year, approximately $6,000,000,000 of debt to fund this transaction, including over $4,000,000,000 of incremental debt and the remainder to replace Wyndham's existing debt.

Speaker 3

Our financial advisors estimate this leverage level would take 3 to 4 years call, to delever from even if the company were to allocate nearly all of its excess cash flow towards paying down the debt time, we are pleased to report that we are in the position of the company's business and potentially longer depending on the macro environment. Choice has historically been heavily reliant on its balance sheet to grow its system. From 2017 through 2019, Choice deployed $500,000,000 to grow their system organically at a 3% CAGR. Conversely, from 2020 through the Q2 of this year, Choice has deployed less than $150,000,000 and their system has growth through the $675,000,000 acquisition of the rights to use the Radisson brand in the Americas, Which has accounted for the entirety of the reported system growth since the transaction closed of August of 2022. And Choice's declining organic growth will only be exacerbated when it cannot use its balance sheet to generate net room growth as it's done in the past.

Speaker 3

Time, the higher leverage contemplated for the transaction would drastically shift the pro form a company's focus to deleveraging, time, we are projecting meaningful investment in growth for multiple years, which could significantly impact the pro form a company's trading multiple. In addition, the cost of debt required to fund this transaction is materially higher than historical levels. Servicing the debt stack for the proposed transaction, would require over $200,000,000 of incremental interest cash outflows compared to just 2 years ago. This higher cost of financing would further diminish the cash available to invest in the business. And while synergies could help delever, we note they take year, we have a couple of years to achieve and have an initial upfront cost to secure them.

Speaker 3

The lack of availability of growth capital is a turn for our Board, given how Reliant Choice has been on their balance sheet historically to grow their system and given the significant momentum and success, Wyndham's has joined today, which may be impaired in a constrained capital environment. In conclusion, our Board remains open call, to risk adjusted valuation creation alternatives, whether those are driven from internal initiatives, from external capital deployment or from 3rd party opportunities. And whenever reviewing any of these alternatives, our Board believes that it is imperative to consider the impacts to our shareholders, concludes our franchisees and our team members. And so after considerable review with our financial and legal advisors, call, our Board believes that the Choice proposal is inadequate on multiple fronts, including its unmitigated asymmetrical risk allocation. Conference call, the confidence our Board has in our standalone growth strategy that is not being considered by Choice in its opportunistically timed offer time, we will be pleased to announce that we will be able to provide additional upside risk call, we will continue to execute our business model, drive growth, allocate excess capital appropriately and maintain strong partnerships with our franchisees to drive shareholder value.

Speaker 3

And with that, we'd be happy to take your questions. Operator, you could please open up the line.

Operator

The floor is now open for questions. Our first question comes from Joe Greff of JPMorgan.

Speaker 5

Good morning, everybody. That's probably my question is probably best directed to Steve. Interpreting the totality of your comments since last week, I'm interpreting them as choices offer and maybe any modest tweaks to what the most recent offer is dead on arrival. That's not my question, if that's a correct interpretation or not. My question is this to Steve.

Speaker 5

Have you talked to Stuart or Pat Since last week and have there been any more current discussions and I'll leave it broadly open to any kind of risk mitigants that you've eloquently referred to today, whether that is a sort of a creative break fee or collar or tipping fees, more cash, suggesting to them maybe how they can raise cash through equity issuance that would then wouldn't be given to you guys or equity transfer to you guys to take on call, the risks that you referred to today, and that's those are my questions. Thanks.

Speaker 2

Well, thanks, Joe. There was a lot packed in there and I haven't done these calls for 6 years, so it's good to hear your voice. I used to always say, Joe, that I don't comment on M and A rumors because that used to be what always came up. But this one is not a rumor, and it also is not really M and A. It seems like a desperate grab to try to solve Problems that the company has.

Speaker 2

We have been responsive every step of the way. I have not heard from Choice, since we sent them since we told them, I called and spoke to Stuart and told them that we're disengaging. This is an amazing distraction for the businesses, not only ours, for theirs, a bigger distraction for ours probably than theirs. And just to give you a little bit of history, 25 years ago, 20 years ago, I negotiated a deal to buy choice. And I never talked about it because it's not appropriate, but we negotiated a deal.

Speaker 2

The capital markets turned on us And the credit was not available to make an all cash offer, which is what was desired from the other side. We disengaged as soon as I called and said, I've never turned I've never walked away from a deal before. I've done 40 plus deals, but this one just isn't going to work because the capital markets aren't attractive. Never said anything about it, just kind of went our merry way. Choice has contacted us multiple times over the years and we've told them we've looked at it, we've decided what's In the best interest of our shareholders and nothing has been done about it.

Speaker 2

This time is different. Now I'm not sure what is different other than the fact that they're not growing, they have some serious issues within their organization. They're trying to address that by making us the And so to answer your question directly, Joe, I'm going a little bit Off the topic here, but I have not heard from them. And we put up multiple Ideas of what they could do, none of which were available to them. So I don't we weren't looking to sell the company.

Speaker 2

They called us, But they called us and they don't have a plan. So their plan seems to be to put out repetitive press releases and see if they can churn the water enough to make it interesting for us. I just don't see that as a plan. That's a bit of a desperate plan. Did I answer the question, Joe?

Speaker 6

You dropped.

Operator

Our next question comes from David Katz of Jefferies.

Speaker 7

Hi, good morning everyone. Steve, good to have you back. I wanted to just talk about some commentary that has come up this week about taking share time, we are pleased to announce that the market share within the limited service and economy segments. It came up yesterday with a peer and was discussed. And in that context, you make some points in your deck this morning about the suspension of development activities for an extended period and what the potential impact of that is.

Speaker 7

Point, if you could talk about broadly speaking, Jeff, the notion of point of this deal, it's come up with investors about whether there are change of control provisions within any of the contracts, particularly the one with Echo that's top of mind and current And whether there could be any impact to the existing franchisee base if this were to get to a place where it went somewhere. And I realize there's about 8 questions in there too. Thanks.

Speaker 3

Well, thank you, David. And I loved your chorus of upside arguments today, headline in terms of continuing net room growth and pipeline growth implying acceleration in long term, no, we couldn't agree with you more. And we're certainly seeing that. I mean, certainly there was no slowdown in the Q3. Q3 was a huge quarter for us with some really, Really great momentum to your point in your note today.

Speaker 3

In terms of brands gaining share to your question, we're gaining on both the conversion side On the new construction side, the one you mentioned that was talked about, I guess, in the deck in a bit yesterday, has had significant momentum to date With EchoSuites, we executed another 60 contracts in the quarter with multi unit developers. End, to date, there is no impact yet on any of the planned 2023 ground breaks. But to what was in our investor presentation today, certainly questions and concerns come up longer term as developers who have not yet broken ground time, I'm wondering are they building an Echo Suites by Wyndham extended stay economy brand for Wyndham or are they building it for choice and that's certainly what we're concerned about, but the quarter was tremendous from an opening standpoint. We opened 15,000 rooms was above our openings level back in the Q3 of 'nineteen where we We hit that 3% net room growth. We saw great growth in our mid scale, great growth in our international direct franchising business.

Speaker 3

And our pipeline is sitting at a record level of 13 consecutive quarters. And we want to keep that up. We want to keep that going. And we don't want the distraction that we talked about in our prepared remarks to impact it in any way.

Operator

Our next question is from Stephen Grambling of Morgan Stanley.

Speaker 3

Hey, thanks. This is a question for either Steve or Jeff. A lot

Speaker 8

of the comments focus on Choice standalone business and Wyndham's standalone business. But given the prior dialogue you've had I'm sure you've had time to think about the strategic merits of a combination and potential synergies. So I'd love to How do you just help us understand how you think about the strategic rationale from a combination, particularly as we look longer term through industry dynamics It seems like competition is ramping for the mid scale space and perhaps that ultimately kind of comes down through economy. Thanks.

Speaker 3

Sure. Yes. In the economy space, I mean, we are, as we've said all along, Choice has been very open that they do not want to be in the economy space, we certainly do, Stephen. I mean, it is why we've said all along, we're so excited about what we're doing With our Echo Suites by Wyndham product in the economy space, it's just a huge, huge market. There's 9,500 branded economy hotels, 22,000 non branded hotels in the economy space.

Speaker 3

And certainly, there are synergies in scale time, we've always said that M and A is in our DNA, 19 of our 24 brands have been acquired since Steve put this company together back in the HFS days, and we'll continue to look for all of those reasons, for immediately accretive tuck in acquisitions that are both EPS and net room growth accretive, brands of high quality, but also brands that don't create displacement issues for any of our other brands. I mean, this is less about the industrial logic and way more about the risks And we will not argue that Wyndham Rewards is a better loyalty program than Choice Privileges. And it's the best program out there for 5 or 6 time, we're pleased to

Speaker 6

announce that we're going to

Speaker 3

be able to share our guests so we understand the industrial logic, but it's less about that and more about the risk as we said in our prepared remarks.

Operator

Our next question comes from Dan Wyshelic of Morningstar.

Speaker 6

Hey, good morning, guys. Thanks for taking the questions. Just wondering if there's any more context maybe you can give on how your conversations have gone thus far with franchisees. And then this might be, I guess, hard to quantify or maybe you can talk about, are there already in your negotiations some third party owners that are waiting to see what the outcome of this transaction or potential transaction is or what percent, I guess, and that might be hard to quantify, what percent might have issues with the change in control that might impact future retention rate or nug?

Speaker 3

Yes, it's a fair question, Dan, and we can't give you a percentage. As we mentioned in the script, we did see an immediate negative reaction from Choice's press release last Tuesday in terms of what they put out and actually began feeling the impact from the Wall Street Journal leak as far back as May from both existing franchisees and respective franchisees who've been expressing uncertainty and concern over what a change in ownership would mean. There are not change of control provisions in our contracts, but franchisees are choosing us more so than they're choosing choices you've seen over the last few years and they're doing business with us because we say all the time to our teams, they know us, they like us, and they trust us. And they're very concerned about losing that culture that we've built. They value Our team's approachability and accessibility and flexibility, I think COVID was a great example of that in terms of how throughout pandemic and crisis, we supported them.

Speaker 3

And so it's been very empowering for our teams to hear the stories of why time, our franchisees want to stay with us and it is really what defines our culture. I mean, our franchisees, 2 thirds of our franchisees and 2 thirds of Choice's franchisees are Ahowa members. And we have a very long history supporting Mahoa, we believe in the power of dialogue and we are standing with our franchisees and and are for all the reasons we talked about not in favor of the deals currently proposed.

Operator

Our next question is from Patrick Scholes of Truist Securities.

Speaker 9

Hi, good morning, everyone.

Speaker 3

Motion for Steve. And I ask if

Speaker 9

you could be as granular as possible in your answer here. Clearly, you've outlined that Wyndham Hotels and Resorts would be materially harmed an offer was made and then it was rejected by the Department of Justice for antitrust reasons or whatever. Could you be as granular as possible, what do you think would be a fair compensation or breakup fee time, I would like to turn the call back to Wyndham, if you were to agree to an offer.

Speaker 2

Well, Patrick, it's Good to hear from you. Haven't heard your voice in a while. But the answer is no. I cannot be more granular because I don't think that's any there's no reason for us to discuss that on this call. We have tried to raise it with choice at one point, they've been in denial for quite some time.

Speaker 2

Initially, they didn't think the antitrust issue was even an issue. Then they came back and said, well, maybe it'll take 3 months to clear it. And it took us many, many meetings with our professionals meeting with theirs For them to acknowledge that no, this could be a 12 to 18 month process. So what do you think the odds are of us getting them to understand the impact it could have on our business? They have no risk.

Speaker 2

This is they're playing with house money here. And frankly, they'd be playing with our money if they could get a deal done, Because that's how they would finance the purchase. We don't need them to do that. And so I think it's just I think it's inappropriate for me to try to address your question on this call and I haven't heard from them, so I don't know what their ideas are.

Operator

Our next question is from Brandt Montour of Barclays.

Speaker 10

Just following up along those lines,

Speaker 3

the risks that you listed out here

Speaker 10

of the combination doesn't necessarily address culture risk, right, which is something that thematically seems to be coming up in a lot of these discussions today, Which is that in a combination situation, given that your culture with your owners seems to be a primary driver of your organic growth, do you think that would be at risk in a combination outside of on top of the leverage and extended balance sheet?

Speaker 8

Yes, I think

Speaker 3

it absolutely is, Brent, a concern and risk of our team. I mean, we've made tremendous progress over the last several years improving our retention rate and retention rates we feel are really the best measure of franchisee engagement. Our economy retention rates are several 100 basis points ahead of choices. And again, it gets back to comment I made in terms of how our franchisees feel about our teams in terms of wanting to do business with us in terms of the way we conduct business with them

Operator

our next question is from Michael Bellisario of Baird.

Speaker 6

Thanks. Good morning, everyone. Just want to revisit your comment on the 3rd party opportunities. I guess sort of 2 parts maybe. 1, why haven't you or 2, maybe when will you run a more formal process to proactively evaluate potential transactions with either financial or strategic partners that could maybe maximize value in a more attractive risk adjusted manner?

Speaker 2

Well, thanks for that question. I'll take it and then Jeff or Michelle can add in if they think they need to add anything. But We did not run a process. They approached us. There was first a leak, not sure where that came from, but there was a leak.

Speaker 2

So this has been out there for a while. And if anybody had a great idea that they wanted to bring to the table, we're all ears. I mean, when I first time, I'd heard from the other side. Their question was, are you prepared to transact? And I said, Well, I'm always prepared to transact if it's in the best interest of our shareholders.

Speaker 2

I'm transactional if that's the right thing for our shareholders. But there hasn't been anything that I consider really close to transactional. So I don't know what to add to that to answer your question. Jeff or Michelle, if you have anything, feel free to weigh in there. They're shaking their heads real.

Speaker 3

Yes. No, nothing to add, Steve. Thanks. Okay.

Operator

Our next question is from Danny Assad of Bank of America.

Speaker 11

Good morning, everybody. I mean, thank you for all the details on the deck. In there, you did kind of lay out like an outlook, an EBITDA outlook of $690,000,000 to $700,000,000 in $24,000,000 and that's about 7% to 8%

Speaker 3

growth, can

Speaker 11

you help us walk through the building blocks of how we get there? And then translating that into the $700,000,000 to $750,000,000 of capital allocation capacity,

Speaker 5

what forms could that take

Speaker 11

that of realizing that $850,000,000 a fair value that you kind of lay out?

Speaker 4

Sure. Good morning. Thank you. Thank you for the question. Good morning.

Speaker 4

So for 24, the outlook implies 7% to 8% organic growth and our business is already growing at 6%. So the only change there really is we're expecting 1 to 2 points from growth initiatives That are currently underway and for which we have significant momentum built. That includes the infrastructure build benefit call, as well as the royalty rate improvements we've been discussing, the continued momentum on our retention rate and then some occupancy time, we have a strong recovery as well. With respect to the $700,000,000 to $750,000,000 number, which is just a 2024, illustrative example of how much cash we would have available to deploy At the midpoint of our target leverage range and I would note that that goes up to $1,000,000,000 at the 4 time high end of our target leverage range, I think we're just trying to show that is capital we have available to invest to drive future growth At the EBITDA line or obviously to return to shareholders at the EPS line should no growth initiatives

Operator

we'll take a question from Meredith Jensen of HSBC. Your line is open.

Speaker 12

Yes. Good morning. I was just trying to look ahead and explain to people what sort of happens next and what we could look for. And just in terms of the this what can we kind of take a look at to feed into beyond all the great information you've given us today? Thanks.

Speaker 2

Well, I guess, I'll this is Steve. I'll start that one. The right now, It's a confusing time. As you can imagine, the sales forces out there are not just sitting idly by And not trying to take advantage of this disruption. So we know that the other side is out there saying a lot of things that are not attractive to us And that make it more difficult to transact business.

Speaker 2

So I don't know that I would necessarily look at just retention in the short term. In the long term, absolutely. Our Owner First philosophy that Jeff has continued to push hard is all about us delivering more value for our owners. Do you want to talk about that anymore, Jeff?

Speaker 3

Yes. Meredith, I think it's not, as Steve said, only about retention. It's really about our time, how our franchisees feel about us. So as you follow the threads through all of the Ahora chatter that's out there in terms of why Wyndham is a great company to do business with, it's also about, as Steve said, what's happening on the execution front. I mean, despite if you look at year to date transaction volume still down 50% to prior year and down 30% to 2019, our teams were able in the 3rd quarter time, we signed 10% more deals year on year with this rumor out there and 60% more deals versus 2019.

Speaker 3

And it's not just Echo. Those signings were up without Echo and Echo still are everybody in Echo Camp is calling us and saying, we hope this deal doesn't happen and we're with you folks. But I think it's as importantly, what happens to that continued pipeline that has marched on to an historic high right now. Yes, I guess I'll leave it at that.

Speaker 2

Yes. Meredith, it's Steve again. You I'm thinking back to your question. You started question, what are the next steps? And that's actually a very good question because it's hard for us to say no More than we've already said no.

Speaker 2

And really they have to decide that they want to lay down their pen In their PR machine and let's get back let's all get back to business. We can't force that to happen. It's not attractive what they're doing. It's not I don't think it's very friendly. So if you want a friendly deal done, you don't approach it the way they've approached it.

Speaker 2

God only knows how they can get a deal through the FTC time, I just thought, well, they're smarter than that. They won't do it, but they made a different decision. So it's very hard for us to say what's next. The ball is really in their court.

Operator

It appears that we have no further questions at this time. I would now like to turn the call over to Jeff Belotti for any closing remarks.

Speaker 3

Okay. Thanks, Leo, and we appreciate everyone's continued interest in Wyndham, end, we thank you for joining this morning's call. Michelle, Matt and I look forward to talking to many of you today and in the weeks months ahead at many of the upcoming investor

Operator

Thank you. This does conclude today's Wyndham Hotels and Resorts Third Quarter 2023 Earnings Conference Call. Please disconnect your line at this time and have a wonderful day.

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Earnings Conference Call
Wyndham Hotels & Resorts Q3 2023
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