Q2 2023 Choice Hotels International Inc Earnings Call
Okay.
Ladies and gentlemen, thank you for standing by welcome to choice hotels International second quarter 2023 earnings call.
At this time all lines are in a listen only mode. I will now turn the conference over to Allie Summers Investor Relations Senior director for choice hotels.
Good morning, and thank you for joining us today before we begin we'd like to remind you that during this conference call certain predictive or forward looking statements will be used to assist you in understanding the company and its results actual results may differ materially from those indicated in the forward looking statements and you should consult the company's.
First in Q10-K, and other.
Our SEC filings for information about important risk factors affecting the company that you should consider.
As far as looking statements speak as of today's date and we don't do.
We're seeing no obligation to publicly update them to reflect subsequent events or circumstances, you can find a a conciliation of our non-GAAP financial measures referred to in our remarks as part of our second quarter 2020 Free earnings press release, which is posted on our website at choice hotels, that's come in there.
The Investor Relations section.
This morning, <unk> patients, our president and Chief Executive Officer, and Dragovich, Our Chief Financial Officer will speak to our second quarter operating results and financial performance. Some patent downs remarks, we'll be glad to take your questions and with that I'll turn the call over to Pat.
Thank you Ali and good morning, everyone. We appreciate you taking the time to join us.
Pleased to report that choice hotels, once again generated impressive earnings fueled by our best in class Hotel conversion capability and our exceptional success in rapidly integrating Radisson Americas ahead of schedule.
At the same time J D power ranked two of our fastest growing brands number one and guest satisfaction.
Cambria hotels in the upscale segment.
And would spring suites in the economy extended stay segment.
Our strong performance and the velocity at which we are executing have enabled us to further invest in our business to drive significant.
Long term earnings growth.
And returned a meaningful amount of capital to our shareholders.
Let me start with the momentum we have created in our adjusted EBITDA growth.
Our distinct growth strategy and best in class franchising business that Jim drove our second quarter 2023, adjusted EBITDA to $153 million, which was 18% higher than the prior year and marked a new quarterly record.
Fueling our success is our commitment to strengthening the value proposition, we provide to our franchise owners, allowing us to convert independent and competitor brands to our flags, while growing our effective royalty rate.
Which increased by six basis points for the first six months of 2023 year over year.
We expect to carry this strong momentum through the rest of 2023 as we grow our franchise business with hotels that generate higher royalties per unit, while leveraging the stronger business delivery engine, we have built to improve the profitability of each franchise.
What gives us even more optimism is the significant scale driven platform and then ciliary revenue growth opportunities, we expect to realize from the integration of the Radisson America's brands.
This acquisition has created a step function change in the size of our business.
Banded our loyalty program.
Extended our co brand credit card opportunity.
And increase our footprint in the Americas region.
At the same time, we were also able to leverage learnings from the Radisson Americas business Division, which we believe will create significant value for our franchisees and guests.
Specifically, we are very pleased with the new co brand credit card agreement, which is already exceeding our initial earnings expectations.
We believe this strategic partnership will provide an additional tailwind for our platform business segment for the remainder of 2023 and beyond.
At the same time and as a result of our strong organic growth and the acquisition of Radisson Americas, we have more than doubled the EBITDA contribution of our international portfolio.
Our international divisions performance has exceeded our expectations with second quarter Revpar significantly above 2019 levels.
Our international portfolio wide revpar increased on a comparable basis, 16%.
With the Americas region growing 23% compared to the same period of 2019.
We see this trend as a strong enhancement to our company's future growth.
Over the past year, our strategy has enabled us to achieve remarkable financial results complete.
Complete a strategic acquisition.
And returned over $655 million to shareholders through our share repurchase program.
Representing 10% of the shares outstanding.
Significantly outpacing our historical share repurchases.
Our future growth is now enhanced by the addition of the Radisson America's brand to our best in class business delivery engine and we are excited about the new growth vectors, we are now able to unlock.
As such I'm pleased to report that we are raising our outlook for full year 2023 adjusted EBITDA.
The very subtle business, we have built provides diversified avenues of growth throughout various economic environments.
We attribute this success to our diverse portfolio of well segmented brands across a wide variety of price points to suit the needs of a broad array of consumers and hotel developers.
These brands represent a healthy mix of conversion and new construction properties, allowing us to grow in all economic cycles.
In today's higher interest rate environment, our diverse portfolio of brands allows us to leverage our core competency.
A best in class hotel conversion capability that fuels, our current earnings growth.
These converging projects move through the pipeline at significant velocity and have a higher opening success rate than new construction projects, reflecting their lower upfront capital and risk exposure.
We expect conversion activity to remain robust for the foreseeable future.
And we believe we are uniquely positioned to capitalize on due to our established operational excellence and the strategic investments. We have made in our portfolio of 19 conversion brands spanning all of our segments.
This is one of the reasons. We are so confident that we can further build on the annual double digit adjusted EBITDA growth. We have delivered for the past five years, excluding pandemic impacted 2020.
And it's why we expect to deliver approximately 10% adjusted EBITDA growth year over year in 2024.
Franchising has always been the cornerstone of our distinct strategy.
And in the last five years, we have launched or acquired a number of incremental conversion and new construction brands to expand the reach of our franchise business in more revenue intense segments.
The new franchises in these segments are more accretive to our earnings and a key driver of our future earnings algorithm.
By expanding our scope.
Network, our franchisee relationships and customer reach we.
We have significantly increased our market opportunities.
And accelerated our growth.
Our selective unit growth strategy is delivering results and improving the attractiveness of our brands.
In the second quarter, we grew the number of domestic franchises across our more revenue intense segments by 10% year over year.
And saw a material increase in royalties driven by this growth.
Adding to our optimism is the strong openings momentum across all of our segments with the company executing on average of more than four hotel openings per week for a total of 107 hotel openings, a 39% increase year over year.
In addition, we grew our international rooms by 12%.
And expanded our international rooms pipeline by 29% in the second quarter year over year.
Importantly, we are delivering this growth, while improving our guest satisfaction scores and enhancing our brands value proposition to consumers.
We are very proud that two of our brands ranked number one for guest experience among upscale and economy extended stay hotel brands in the recently released J D Power 2023, North America Hotel guest satisfaction Index study.
According to the study Cambria was recognized as the top upscale brand.
Outperforming 19 other brands with the highest score in all six of the studies upscale guest satisfaction factors.
At the same time, what spring suites earned top honors in the economy extended stay category.
Scoring highest in all five of the studies guest satisfaction factors for this segment.
This recognition is a testament to not only our strong portfolio, but also our franchisees hard work and dedication to customer service.
Underscoring the success, we've had and providing our franchisees with the best in class tools and solutions that enable them to deliver exceptional guest experiences.
Let me provide more details about our core hotel conversion expertise.
Attracted by our strong value proposition hoteliers are choosing our brands versus the competition as they seek to improve their operations.
Liver strong topline revenues and lower their costs.
Thereby boosting the long term value of their hotels.
In fact in the second quarter, we drove a 28% increase in our domestic rooms pipeline growth for conversion hotels quarter over quarter.
And we expect more than 60 conversion projects to open within the next three months.
In addition, nearly 80% of the domestic agreements awarded in the first half of the year were four conversion hotels.
Of the 126 domestic franchise agreements, we executed for conversion hotels in the first half of 2023.
Two thirds have already opened or are expected to open by the end of this year.
Through our superior speed the market conversion processes and best in class franchisee support we're able to move projects quickly through the pipeline.
In fact, we are opening the doors of our economy and mid scale properties as royalty generating hotels in just under 100 days on average.
The velocity of our conversion openings has been so quick that some conversion hotels never appeared in our quarterly pipeline numbers.
This momentum we see in conversion activity gives us further confidence in the prospects for our continued growth in 2023 and beyond.
Let me now turn to the incredible success, we have achieved and the integration of the Radisson America's brands.
The speed with which we have integrated Radisson Americas is truly remarkable.
And our ability to rapidly drive synergies and quickly integrate brands is key to our long term success.
Thanks to our integration expertise and strategic investments in state of the art proprietary technologies, we have already achieved $80 million of annual recurring synergies.
Exceeding our original target.
Sooner than expected.
At the same time, we anticipate unlocking additional future cost and revenue synergies now that the hotels have begun transitioning onto our business delivery engine.
Our deliberate efforts enabled us to return the Radisson Americas business unit to profitability in 2022, our first year of ownership.
This year, we are ahead of schedule in delivering Radisson Americas adjusted EBITDA.
And next year, we project this number to grow to over $80 million.
As a result of our speed of execution, our guests and franchisees across the entire portfolio of brands are already reaping substantial benefits from the integration.
Just two weeks ago, we completed key integration milestones specifically.
Specifically, we on boarded the nearly 600 Radisson Americas hotels onto our world class reservations delivery engine.
And integrated the two award winning loyalty programs.
All within less than a year of acquisition.
We also provided Radisson Americas franchisees with access to key resources in tools, such as choice University.
It's widely awarded learning platform in the hospitality industry.
This month, we started migrating eligible radisson Americas hotels to our proprietary cloud based best in class property management and revenue management systems.
And by year end with all Radisson Americas hotels fully integrated with choices systems and employing our tools, we expect to help drive their top line performance and reduce their operating costs to bring their profitability to the next level.
Rabbits in Americas franchisees are shared with us their enthusiasm for becoming part of the choice family.
Specifically the opportunity to leverage our proprietary cutting edge technologies and world class franchisee success system.
The excitement generated by our new business unit is further underlined by Radisson Americas performance.
In the second quarter the Radisson.
Portfolio wide Revpar increased three 8% year over year spin.
Specifically, the Radisson upscale brand itself grew nearly 13% year over year outperforming the upscale segment by seven percentage points.
Our impressive results demonstrate that the deliberate decisions and strategic investments, we've made in our value proposition and franchisee tools.
Brand portfolio and platform capabilities are paying off across our segments.
First we strengthened our upscale franchise business.
In the first half of 2023, we grew our domestic upscale units by approximately 32% year over year.
Highlighted by a nearly doubling in the number of new hotel openings.
At the same time, we increased the number of domestic upscale franchise agreements awarded for conversion hotels by 44% year over year and expanded our domestic pipeline to 127 hotels, a 27% increase year over year.
We expect that the Radisson Americas acquisition will enable us to build on our momentum in the upscale segment accelerating the growth of our Cambria and ascend brands, while also broadening the radisson portfolio.
Next.
We further invested in the extended stay franchise business and grew our domestic pipeline by 17% year over year at mid year.
And in May execute at the highest number of openings for a single month in over two years.
We remain very optimistic about our extended state franchise business growth and expect the number of our extended stay units to increase at an average annual growth rate of.
Of more than 15% over the next five years.
At the same time, we reinforce our core portfolio of brands by growing our domestic upper mid scale franchise business by 24% year over year, reaching.
Reaching approximately 2300 domestic hotels in the first half of 2023.
Finally by strengthening the value proposition, we deliver to our franchise owners in the economy transient franchise business. We grew our effective royalty rate for that segment by seven basis points in the second quarter year over year.
The results we achieved in the second quarter 2023 confirm the effectiveness of our thoughtful deliberate approach to growing our franchise business with hotels that generate higher royalties per unit.
And reinforce our confidence in our ability to drive exceptional results in the coming years.
We look forward to completing the integration of Radisson Americas with the choice franchisees success system and accelerating the growth of these brands by leveraging choices scale network of owner and franchise relationships and best in class digital platforms.
We believe we are well positioned to build on the success achieved this quarter and our powerful earnings algorithm and speed of execution will enable us to further capitalize on growth opportunities in 2023 and beyond.
In closing I would like to take a moment to thank our associates.
Their invaluable contributions and hard work to achieve our results.
In addition to growing our core business. This incredible group of dedicated experts across our business.
Also achieved something truly remarkable.
The integration of the Radisson Americas hotels ahead of schedule and less than one year since we closed the transaction.
Thanks to them our business is now stronger now.
The value, we are bringing to our franchisees and guests is increasing.
And our shareholders are better position to benefit well into the future.
With that I will hand, it over to our CFO .
Tom.
Thanks, Pat and good morning, everyone today, I would like to provide additional insights on our impressive second quarter results update you on our balance sheet and capital allocation approach and share expectations for what lies ahead.
Throughout my remarks today I would like to note that all figures are inclusive of the Radisson Americas portfolio and excludes certain onetime items, including Radisson Americas integration costs, which impacted the second quarter reported results for.
<unk> second quarter 2023, compared to the same period of 2022.
Revenues, excluding reimbursable revenue from franchised and managed properties increased 28% to $227 $8 million.
Our adjusted EBITDA grew 18% to $153 $1 million driven by strong unit and effective royalty rate growth successful execution of the Radisson Americas integration.
The robust performance of our platform procurement and international businesses and continued comparable margin expansion.
And our adjusted earnings per share were $1 75, an increase of 22%.
Let me turn to our key revenue levers beginning with our unit growth, where our portfolio is absolute size and the royalty revenue per hotel our key advantages.
Our strategic goal has been to accelerate quality room growth and more revenue intense segments and markets, while simultaneously growing our effective royalty rates, which ultimately results in an outsized increase in royalties.
In addition to a mixed shift strategy for the broader portfolio. Our revenue maximization strategy is also evident at the individual hotel and brand levels.
In fact for second quarter 2023, New hotels, we added within a brand continued to generate an average of 20% higher royalty revenue than hotels exiting the brand.
For second quarter 2023, our domestic system size of the more revenue intense upscale extended stay and mid scale segments grew by 10% while rooms grew by 12% year over year highlighted by an over 50% increase in the number of new hotel openings compared with second quarter.
<unk> 2022.
We also increased our international system size by 9% while groups grew by 12% year over year.
Our domestic and international unit and rooms growth represents an acceleration versus the first quarter of this year.
Reinforcing our optimism is our domestic and international rooms pipeline, which grew 9% and 29% respectively in the second quarter year over year, and which we expect will drive our revenue intense unit growth for years to come.
At the same time by leveraging our best in class conversion capability, we expanded our global rooms pipeline for conversion hotels in the second quarter by 25% compared to the first quarter of this year and 14% year over year.
We are very optimistic about our growth prospects across all of our key segments.
For example, the Cambria brand grew by 15% year over year, reaching 69 units with an additional 71 domestic properties in the pipeline.
In addition, the number of domestic franchise agreements for our ascend hotel collection, which ranks as the largest global soft brand with over 360 hotels worldwide increased by 44% through the end of June year over year.
Our newest extended stay brand ever home suite is gaining impressive traction across the development community with over 60 domestic projects in the pipeline.
At the same time, what spring suites pipeline reached nearly 300 domestic properties as of the end of June a 32% increase year over year.
And since it's successful refresh the comfort brand has now registered 14 straight quarters of unit growth year over year.
We are pleased with the accelerated net unit growth trends, we are driving.
Midway through the year, our domestic system growth of the more revenue intense segments is tracking slightly above our guidance of approximately 1% for full year 2023.
Our effective royalty rate also continues to be a significant source of revenue growth.
Our domestic system effective royalty rate for the first half of 2023 increased six basis points year over year, including a six basis point increase for the legacy choice brands to $5 one 1%.
Given the attractiveness of our proven brands the strengthening of our value proposition to our franchise owners and our long term investment strategy on behalf of our franchisees. We are confident in our ability to expand the overall size of our portfolio as well as grow our effective royalty rate for both the legacy choice brands and the.
Our Radisson Americas portfolio.
Inclusive of Radisson America's brands, we are maintaining our outlook for our full year 2023 effective royalty rate to grow on a comparable basis in the mid single digits year over year from a 493% baseline in 2022.
The third revenue lever I will discuss is our revpar performance last year, our second quarter Revpar increased 13% from the same quarter of 2019.
This year, we are building on that growth with our second quarter revpar, increasing by an additional 50 basis points year over year.
This revpar growth was driven by both a three 8% increase and Radisson Americas performance and continued growth in our legacy choice portfolio year over year.
Importantly, the Radisson upscale brand itself outperformed the segment's revpar growth by seven percentage points in the second quarter.
We are maintaining our guidance for full year domestic revpar growth and continue to expect domestic revpar growth to increase approximately 2% compared to full year 2022.
This represents an approximately 15% increase compared to full year 2019.
As Pat mentioned, we continued to build on the strong momentum of our platform business spin.
Specifically in the second quarter, we increased our platform and procurement services fees by 32% to $28 8 million.
Compared to the same period of 2022.
We believe that we can drive the strong revenue growth in the years ahead as we increase the number of products and services, we offer to nearly 7500 hotels.
Tens of guests and other travel partners, while expanding our platform.
I'd like to now turn to the strength of our balance sheet, which we believe will be another driver of our growth for years to come.
We maintain a best in class balance sheet with a gross debt to EBITDA leverage ratio of two seven times, which continues to be below the low end of our targeted range of three to four times as of the end of second quarter 2023.
Year to date through July we returned approximately $290 million to our shareholders.
These returns came in the form of approximately $28 million in cash dividends and $262 million in share repurchases.
And as Pat mentioned, we have now repurchased 10% of our outstanding shares through our share repurchase program, returning over $655 million to shareholders over the last year alone.
With our strong cash flow and debt capacity, we are well positioned to build on our record of making strategic investments growing the business and returning excess cash to shareholders well into the future.
We plan to continue to leverage all pillars of our capital allocation strategy for the remainder of the year.
Before opening up for questions I'd like to turn to our expectations for what lies ahead for the remainder of the year.
Since publishing our July business update we refined our outlook for the remainder of the year given more favorable than initially expected June financial results stronger forecasted platform in international revenue and additional approved investments to drive long term growth.
I am pleased to report that we are raising the midpoint of our outlook range for full year 2023, adjusted EBITDA and now expect it to range between $530 million and $540 million representing.
Approximately 12% growth at the midpoint year over year, and 43% growth compared to full year 2019.
As we look into 2024, we expect to generate adjusted EBITDA growth of approximately 10% year over year, driven by incremental contribution from Radisson Americas as well as organic growth and the more revenue intense segments and markets.
Strong effective royalty rate growth and other factors.
For full year 2023, we expect adjusted diluted earnings per share to range between $5 86 and.
And $6 <unk> per share representing a 13% growth at the midpoint of our guidance year over year.
Today's results are a testament that our strategy is working and we intend to keep investing in the core growth vectors across the more revenue intense segments.
At this time, Pat and I would be happy to answer any questions operator.
Yes.
Thank you ladies and gentlemen, we will now begin the question and answer session should you have a question. Please press star followed by the one on your Touchtone phone.
You'll hear three tone prompt acknowledging your request should you wish to remove yourself from the queue. Please press star two.
If you are using a speaker phone please lift the handset before pressing any keys one moment. Please for your first question.
First question comes from Michael Bellisario of Baird. Please go ahead.
Thanks, Good morning, everyone.
Just a first question. Good morning, just the first question on the 2024 expectations can you maybe help us understand.
Your underlying assumptions to get to the 10 plus percentage growth rate and that some of the building blocks in terms of dollars that get you. There in 2024 that'd be helpful. Thank you.
Yes, sure Michael Let me, let me just start I mean, I think if you look at the <unk>.
Organic growth of our business.
It has just been exceptional over the last several years to be if you look at this year.
And the year's going back all the way to 2017, we've grown EBITDA.
And then 10%.
And that trend could trend continues this year you look at the last year in itself. We grew our earnings organically by 10% complete a strategic acquisition bought back 10% of our shares outstanding and today, we sit with a business that's got multiple avenues of growth.
Our brand mix, it's a mix of revenue intense new construction and conversion hotels from the upscale segment all the way down to the economy.
Segment, plus extended stay our international business is now much more robust as we talked on the prepared remarks that we've effectively doubled the size of that business and what's really exciting is the scale advantages now that are going to allow us to really monetize the credit card co brand opportunity.
And a lot of the platform revenue opportunities, we have with our travel partners. So all of those are factors that are really giving us a lot of confidence in our ability to keep this double digit EBITDA growth going into the future.
Any other specific building blocks in terms of underlying revpar growth Royals.
Royalty rate expectations.
I know you provided some radisson commentary.
Yes, if you think about if you wanted to create a little bit more of a tactical bridge I mean in the past we guided to the fact that radisson would be increasing from $60 million or more of EBIT contribution this year to over $80 million. So thats about a 4% growth in terms of the overall EBITDA of the business going forward talked about our revenue and <unk>.
<unk> unit growth starting to approach those historical level, so call it 2% to 3% and a more stabilized environment. So maybe youre getting closer to that 2%, which would represent another 2% overall EBIT growth I talked about our platform business, especially just when you think about the co branded credit card contributing another $5 million or so heading into next.
Year and that our effective royalty rate, we expect to continue to maintain that in the mid single digits. So theres, a theres really a path to get to that 10% even in a revpar environment that is essentially flat. Obviously, we expect to continue to maintain our share if not grow our share just from an RPI perspective in the future. So the industry Revpar growth.
At those historical rates, you would expect to see another couple of percentage points of contribution there as well, but to pass point I think the most important thing is this business has a ton of revenue levers at its disposal and there is a path to get there and any sort of revpar environment.
Got it that's helpful. Thanks for that detail and then just follow up on the development pipeline you mentioned the hurricanes are up almost.
25% versus just the prior quarter, but the overall pipeline is down so presumably that's all under construction hotels correct and then if that's correct, maybe what's driving that and when do you see that sort of bottoming out looking forward. Thank you.
Yeah, Yeah part of the part of the pipeline is obviously timing obviously, we are focused on higher quality.
<unk> agreements that are being awarded so we're really targeting those more revenue intense franchise agreements that we anticipate having a higher opening success rate. So maybe the development results and when you think about it kind of year over year are down slightly so there is an element there.
Pat mentioned, the strong openings and the velocity in which these are moving through our pipeline we.
We do continue to terminate those assets out of our pipeline when we feel like there is a lower likelihood of success, but when you look at the pipeline itself Michael.
Very healthy greater than 50% of our domestic pipeline is either under construction is.
As a conversion hotel or has financing secured about 30% of our pipeline is essentially conversion hotels, which have a very high opening success rate when you get back to the.
The back half of the year. That's when you tend to see your development results Spike up pretty significantly so you tend to see.
Quarter over quarter growth in the pipeline in quarter four in particular, that's significantly higher than what we've seen over the course of the last couple of quarters.
Okay. That's helpful.
Thank you.
Thank you. The next question comes from Danny Assad of Bank of America. Please go ahead.
Hi, good morning, everybody.
You're just at a higher level your fees grew in the quarter like meaningfully ahead of what Revpar plus unit growth would give you something to the tune of like 6% and so can you maybe just talk about that and how we should expect that spread to kind of perform as we look into the back half of this year as well.
Yeah.
So when you think about just the fees overall, obviously the contribution from Radisson are now in those royalty and revenue line items.
But on an apples to apples basis, the way that I would kind of describe the business right. Now is your adjusted revenue for choice grew about 9% year over year, Pat mentioned, the fact that kind of on an apples to apples basis. Our EBITDA is up almost 10%. So we feel very good about the organic growth prospects of this business I think going forward.
Word youre going to continue to see strength in some of those ancillary fees platform. We've talked about the co branded credit card other programs and services that will be offering our franchisees, but when you look at the core royalty line item itself. We expect like I said the last question the effective royalty rate will likely grow in the mid single digits. Every one basis point is about one.
Dollars.
We think that that revenue intense unit growth is going to continue to kind of approach those historical levels.
Each 1% is about $4 $5 billion and then obviously, we talked about Revpar and just we do expect to continue to maintain or steal share I think what's what's core to the outsized royalty performance is really the fact that we're focusing on higher royalty per unit hotels. We are starting to continue to see that mix shift into more revenue intense segments, but the 20 <unk>.
That higher royalty per hotel, even within a brand or a location itself is really driving that earnings algorithm.
Got it got it thank you.
And then just on on room like if I'm just looking at room count your domestic room count at about 5% less than the third quarter of last year for Radisson, specifically and it's sort of natural for there to be some level of churn when theres brand M&A.
I guess my question is when would you expect that to slow down and then when would you expect you know along with that any onetime integration costs and all of these like the add backs when when would you expect that to fade.
Yeah, Dan let me start and Don can jump in I mean, when we looked at buying this business. It was a business that was effectively underinvested in and I think a lot of the.
Terminations that we've seen where the where things we expected we did a pretty significant deep dive into their pipeline and their existing franchise agreements end.
Which franchisees were at risk of leaving so that was all written into the underwriting of the of the transaction. It's the reason why we really sped up the integration here, we want to bring the value prop to these owners quickly and demonstrate the significant upside that they are going to get.
We are already seeing it we're seeing traffic to the hotels that.
Are now integrated onto our systems increase beyond our expectations. We're seeing the look to book ratios go up in the Radisson brands versus where they were prior to being integrated. So we are achieving what we expected to achieve which is bringing that business delivery in those customers.
To our to our franchisees, where we know that they are on the platform.
We have the ability to know you're not just selling the future potential youre selling reality.
And so our development team has been focused on.
Really looking at what is the opportunity now to take that value proposition as we move into the back half of the year here.
And begin to grow these brands as we say all along and we look at M&A, we want to grow the ROI for the franchisee certainly we're doing that but we also want to grow these brands for the benefit of our shareholders and Thats that is.
What's coming if you look at what we've already done.
With some of the key wins, we had on both new Radisson ins and some radisson.
Retention efforts that we put in place we've been pretty successful actually more successful than our expectations were going in so we feel pretty confident about our ability to get these brands on our platform get the value prop where it needs to be and get them growing into the future.
And then just a follow up.
Go ahead, sorry, no no no go ahead.
No just saying you know when you think about the 5% or so you were talking about 20 assets in particular in the Pat mentioned that obviously in many cases. These were what's the comfortable letting go we've been even more successful on reelection renewables close to 30 hotels. So.
It is a higher quality asset, they're making that decision I think to your point on when do you expect to see the portfolio stabilize I think we're expecting that to past point going forward into 2024, I think that you would expect to see stabilization and growth I think the Radisson legacy brand or the core brand itself is more of a conversion brand. So I think we would expect to see that.
Grow faster.
In the short term and that I think country Inn and suites is more of a new construction brand you would start to see that more in 2025, but we would expect to see that portfolio stabilize your question specifically on the integration cost we did make the decision to past point to invest and accelerate the integration. We're happy we did I think the results speak for themselves EBIT tracking much higher.
Expectations.
We would expect these costs I think to slow significantly for the remainder of the year and then at the end of this year. When you look out on a comparable basis. It was a bit of split essentially be pretty immaterial now a few.
Single digit millions, maybe what could trickle into 2024, but broadly speaking we think the heavy lift is kind of now behind us and you're going to start to see those decelerate heading into the back half of the year.
Okay got it and then if I could just sneak in one last one so so given that success at least we've seen thus far with Radisson.
How are you thinking about M&A opportunities going forward and as Radisson, giving you like an execution playbook from here on out.
Yes, I think that we've had with the woods spring acquisition five years ago, which was not really a synergy deal that was a lift and shift to invest in and it turned out to be a very successful really a home run for us with regard to kind of reinvigorate extended stay segment for us and really getting out in front of the rest of the industry.
<unk>.
Radisson is different radisson is bringing us a higher revpar and more revenue accretive, bringing us more of a business traveler a younger demographic.
But a significant amount of synergy as we as we talked about that $80 million.
We don't always look at these acquisitions from up from an execution perspective as the same.
But we've certainly developed a.
Pretty strong capability within the company to rapidly integrate brands and it's not a I think the playbook is the same for a lot of the underlying key factors, but in all of these things you have to look at what the value drivers are in the case of Woods spring, we had a very strong pipeline of very strong prototype.
It needed was the growth engine in the development capabilities that we have and we certainly brought that to market with radisson needed was business delivery that needed a bigger loyalty program it needed a bigger platform for reservations.
All of the tools that we bring on revenue management choice University and the like so each of these is a little bit different but I wouldn't say, we've developed pretty strong capability as a company to rapidly integrate and realize the value of an acquisition in a pretty rapid timeframe.
Got it thank you very much.
Yes.
Thank you. The next question comes from Stephen Grambling of Morgan Stanley . Please go ahead.
Hey, Thanks, I just wanted to follow up both on the 2024 commentary and that discussion of M&A. I mean is there any additional M&A incorporated in the 10% growth through 2024, and then how are you weighing best uses of capital given leverage levels are still below the chart.
Does that you laid out and it looks like the buyback was a little bit slower in <unk> versus <unk> is that a reflection of maybe there is better opportunities to either bolt ons or other M&A activity. Thank you.
Yes, we're always looking for M&A that fits the two litmus tests that we've talked about.
And the ROI for the owners and growing the brands for the shareholders.
I think as we look forward, there's still some white space.
Our portfolio, there's a lot of potential opportunities on the international front.
So those are those are probably the areas that we'll continue to look at I would say right now I mean, there is the additional.
Boost in 2024, there is still more to come from Radisson as we mentioned there is another $20 million of EBITDA.
Our expected.
A benefit to come in the 2024 number from the Radisson acquisition.
Remember Radisson also brought an upper upscale brand RASK blew it brought rather than individuals. So theres. Some theres. Some other brands that we acquired that theyre going to give us I think some longer term opportunities to continue to grow in segments that we aren't in today. So we can do it organically, but theres also M&A also provides an opportunity for <unk>.
They can do some bolt on.
When those opportunities arise I mean, I think if I look at the shareholder share repurchase.
During the riots in acquisition last summer, we were effectively blacked out.
From buying our own shares in.
So back in August when the window opened we were playing a little bit of catch up and then I think it's a reflection of the fact that we believe that.
And that's the reason we did our business update in early July .
We just didn't believe that the market was understanding the true growth potential that we had I mean I think consensus for next year was it like 4% EBITDA growth. So.
Give us an opportunity to get out and talk about that growth.
And when we see our shares at a discount to intrinsic value, we have been pretty pretty aggressive on the share repurchase front. So I think youll continue to see that so long as the shares remain at a discount to intrinsic value.
Got it and then one other quick.
Follow up I think you mentioned this a little bit, but where are you finding conversions are generally focus as we think about brand or chain scale and do you typically have line of sight.
Does this kind of shorter duration segment of growth on royalty contribution versus the base. Thank you.
Yes, I think when you look at the opportunity out there.
As our value proposition gets better as our franchisees and our franchisee retention rate stays.
Best in class.
Franchisees own other brands and independent hotels, so a lot of that.
Prospecting, we do is within our own franchisee base.
<unk> 6000 independent hotels.
The United States that are in the upscale and below segment. So there is there is ample opportunity for independent hotels as well for conversions and this is a company that's been doing.
The conversion game here for 20 years.
19 of our brands our conversion brands.
So we have a lot of opportunity and it's one of the reasons why we wanted to highlight that the market, where we are today with interest rates being where they are likely to stay there.
The opportunity is going to shift towards more conversions and this is this has always been a strength of choice.
We've proven it during previous.
Points of the economic cycle when interest rates were high so.
It's something that we know how to do well and we have a really strong track record of achieving.
Conversion growth rates in our in our pipeline and ultimately in our hotel openings numbers.
Thank you.
Yeah.
Thank you.
Thank you. The next question comes from Robin Farley of UBS. Please go ahead.
Great. Thanks, most of my questions have been covered already but I did just want to clarify I know you said there are a couple of different ways to get to your 24 guidance.
Yeah.
Did you or maybe could you clarify that that youre not counting on any acquisitions to get to that.
Thanks.
Now to Pat's point, the obviously the $20 million of additional contribution from Radisson is included in that 10%, but no acquisitions outside of the Radisson integration.
Okay, great. Thank you.
Thank you.
Okay.
Thank you. The next question comes from David Katz of Jefferies. Please go ahead.
Hi, good morning.
Two things if I may.
One is I just wanted to be clear.
Clear Patrick earlier you.
Indicated white space.
And.
International opportunities is the white space and.
In the international opportunity the same thing or are those concentric opportunities right, where you see white space here.
In the U S.
In addition to international.
And then I have one quick follow up please.
Yes, I think David it's both so there is white space domestically I mean, if you think about where we are in extended stay we have.
We're having a lot of success with ever homes in the mid scale extended stay segment, but we don't have a product in upscale extended stay so that's an opportunity for us.
Certainly we are just have a little bit of a toe in the water with upper upscale.
With the Radisson Blues.
Radisson.
Collection that we have so there's some opportunity there, but when you look internationally, you'll see the same thing you see significant radisson Blu opportunity internationally in the Americas, where we have the opportunity to grow.
And I would say when we look at the international markets.
There's a lot of different product type.
Doesn't play well in the Americas region.
So when you look a lot of potential acquisitions outside of the U S. The product type may be different and may not be something that you see here in the U S. So there is.
Is there a shorter stay there as there is.
Rooms, where they convert from a business traveler two <unk>.
The leisure traveler. So there is some different models out there on the international front that really work for certain international markets.
I'd say when were looking across the landscape.
Theres certainly white space in the U S and in international but Theres also a different product types that are that are lodging alternatives in the interim.
National side as well so that's effectively what we see when we look across the landscape and when we see we can bring value.
That's where we look for opportunities to maybe bring that into our portfolio.
Understood and if I may I wanted to circle back on the conversion.
Opportunity I think Patrick in your prepared remarks.
You sort of referenced uniquely position and there is no question that you have.
<unk> scaled platform.
And our track record et cetera.
But from the position where many of us.
We're hearing more and more larger entities also talking about <unk>.
Suing conversion opportunities.
What have you what are you able to do to just remain competitive.
And protect those are the opportunities that you've had in the past.
And.
Could continue to capture those as you have.
Yes, I think when you get into the conversion market youre dealing with a lot of different issues. As a company. Then you might if you. If you don't do that on a regular basis. So everything from brand overlap to making sure that tips are tailored to the right product right market the right owner.
And effectively making sure that those tests get completed.
And Ah Pip conversation is not a sale of a franchise.
A sale of a franchises rather uniform or Pip conversation is rather complex and detailed.
It involves a lot of.
Back and forth I would say.
And you really have to make sure that you're achieving what you expect from that hotel in that market for that brand. So it's a different approach to the owner.
And its something as I said, we've been doing for over 20 years, we do it in multiple brands and it's a core competency that we've built so.
When I think about being best in class and being uniquely qualified a lot of it comes from experience.
And that experience drives lessons learned for you on what works and what doesn't and so that's why we're fairly confident in not fairly but we're highly confident in our in our ability to continue to be.
A growth leader on the extent on the conversion front because it's what we do is our core competency and that's what's driven a lot of our.
Brand equity and brand growth over the past 20 years.
David when you look at the numbers please.
Directly speaking our churn has been somewhere in that 4% to 5% range. The vast majority of that is essentially your involuntary churn. So it's a choices discretion at our discretion to terminate that particular franchisee.
When you take a look at where the churn has been year to date and where we expect the churn to be by year end, we're actually tracking at the lower end of that 4% to 5% range. So again from a voluntary perspective, you're still in that historical call it 1% to 2% or so range. So we're feeling pretty good about where we stand from a from a terms perspective.
Understood. Thank you.
Thank you.
Okay.
Thank you. The next question comes from Brent <unk> of Barclays. Please go ahead.
Hey, good morning, everybody. Thanks for squeezing me in.
Just wanted to ask if you could give us the exact.
Radisson EBITDA and baked into the full year 'twenty three.
And then I guess, we can just add $20 million onto that number to get to the new number for 'twenty four.
Yes, Brian so.
Broadly speaking, we've talked about greater than $60 million I would expect maybe there's an opportunity to be slightly below that $65 million or so obviously that could create a little bit of a winner's curse part of this is timing of the synergy. So I think it's safe to assume for the time being that when you look at the 2024 EBITA.
Just over $80 million from Radisson is what you should expect.
Okay. Thank you for that and then you guys reaffirmed full year guidance.
Just a few weeks ago pre.
Pre announcement and then obviously your rates are today, what changed over the last three weeks.
Yeah.
Yes, so when you think about just how things how things have shifted obviously.
When we reaffirm guidance, we felt pretty pretty good about being within the range obviously.
Moved up that lower end of the range from 525 up to $530 million. The financials came in obviously once we close the books of financials came in a little bit better than we expected really the drivers. There you know effective royalty rate continues to trend above expectations, we talked about the platform business.
Some of those other fee streams that are co branded credit card and what we're really seeing is a lot more green shoots in terms of the international portfolio as well both from an actuals perspective.
Rebound internationally has been pretty impressive as well when you take a look at the portfolio.
Higher room room counts et cetera, and when you think about where revpar is in our portfolio internationally I mean, we're tracking.
1% to 20% above 2019 levels, which is pretty remarkable when you think back to where we were.
About 12 months to 18 months ago. So I think it just gave us more optimism that we were going to meet that higher end of the of the adjusted EBIT guidance and when you flow all of those puts and takes through.
Made the decision to make some additional investments off of the marketing and restaurant, which had a slight impact on the as reported net income obviously from an adjusted perspective, that's removed. So broadly speaking, we're pretty bullish on that 530 to 540 and if all the chips fall into place I think we could see a scenario, where we're tracking to the high end of that guidance.
Great. Thanks, so much.
Thank you.
Thank you. The next question comes from Patrick <unk> of <unk>.
<unk> Securities. Please go ahead.
Hi, Yes, good morning, everyone.
Good morning, good morning, good morning.
Think about.
Some of the large public Republic, transformative and I would say keyword transformative M&A in the past.
About.
Mary.
And Starwood.
Pat.
Do you have the view that.
Bigger for materially bigger than formidably bigger can in fact be better at this point for your company.
Thank you.
I forgot I think as you know our policy is not to comment on market rumors if thats kind of where you're going.
Obviously, and we've talked a lot about this and you saw it in our in our script today the scale benefits of the Radisson acquisition.
Another 10 million loyalty program members, bringing in 10% more hotels, bringing in more revenue accretive hotels.
All of those things are creating a bigger business that is not just a royalty and revpar and unit growth story, but it's providing more of the infill and ciliary revenue opportunities for us that have been unlocked by doing an M&A transaction like that so certainly scale matters.
And we have scale today.
And we have scale in the upscale segment, we have scale in the extended stay segment. We have certainly have scale in our core midscale and economy segments. So.
I think if your question is the scale matter absolutely. It does we've done two acquisitions in the past that have.
Been very successful from the standpoint of expanding our presence in key markets, where we were underrepresented. So yes, there's definitely benefits to M&A that bring that scale advantage to you.
Okay.
Along those lines.
For the.
Hypothetically for the right acquisition.
What.
Net debt to EBITDA level would you feel comfortable going up too. Thank you.
Patrick I don't think.
On that I think at the end of the day, you've got to look at it from all of your different stakeholder groups in any acquisition.
Publicly speaking our targeted ranges that three to four times.
I think for any sort of investment that would really drive long term value for all of those constituencies would you could you see it it's kind of that high end of that leverage ratio a little bit higher sure but.
Broadly speaking our stated policy is that three to four times.
Okay.
I'm all set thank you.
Thank you.
Thank you. The next question comes from Joe Greff of Jpmorgan. Please go ahead.
Good morning, guys.
I have another question on on your comments on 2024.
Of the $50 million to $55 million of incremental EBITDA in 2024 versus this year.
How much of that comes from royalty fees versus lower adjusted SG&A and I have a couple of quick follow ups.
Yes, I mean, I think what you would expect on the SG&A line item into the future. Obviously, what we've talked about I think it was maybe one or two quarters ago that you would see the Radisson SG&A, which is slightly above 20 million dropped to somewhere in that $6 million to $7 million range. So we're feeling very good about heading into 2020 for that kind of the integration and the synergies would be behind us.
So portfolio wide, Joe you would expect to see SG&A grow in line with your historical averages, which have trended to kind of low single digits. Obviously for the right investments, we would bring that up to maybe mid single digits. So it kind of puts and takes I think ring. The revenue attached unit growth, we talked about close to that 2% which was.
About $9 million.
Or are in the mid single digits and then obviously I think it's too early to tell in terms of guiding to any sort of revpar.
In 2024, I think what youre going to see where the industry is going to be heading as we head into the back half of this year, but I think the point on that 10% is even in a flat revpar environment that there was still a path to get there.
And and then maybe I'll put words in your math and then you can sort of paraphrase me on how youre thinking about royalty fees for next year.
But if you are assuming portfolio blended revpar that's flat.
And even with modest rooms growth next year Youre, assuming you can grow royalty fees, just based on better mix of upscale and higher price point hotels is that how are you broadly thinking about next year.
Well I think I think you can grow your royalty rate.
Very much in line with what we do.
I think from a revpar perspective, even a mix so I think youre going to get some benefits of a mix shift story without a doubt as you continue to.
To deliver more royalty and the higher revenue intense segments.
Broadly speaking I think there is absolutely still a path, even if that royalty or that revpar rate was muted that you could still get to that 10% with your other two levers that you have so the revenue attached to unit growth with the fact that higher rooms will probably come with that revenue intense unit growth and your effective royalty rates.
And then a follow up.
With respect to operating restructuring due diligence and transition costs and what you have implied.
Implied for the second half.
And I know you sort of get suggested added back to adjusted EBITDA, how much of that falls into the <unk> versus the <unk> I'm, assuming most of it is in the <unk> and then my last question is are there any reasons presently.
That preclude you from buying back stock here in the <unk> and <unk> and that's all for me.
No I think broadly speaking I think Pat hit on me I'll hit your second question first as it pertains to stock buybacks, we would expect to continue to repurchase our shares I think when you look at I know there was some commentary around a slight deceleration from Q1 to Q2, but when you look at the 76 million, that's still well above what we have.
Done historically and to Pat's point, I think we're playing a little bit of catch up coming out of the blackout from Radisson.
We're still at a point, where we feel like our shares continue to trade at a discount. So I had a two seven times leverage ratio. We certainly have capacity to continue the share repurchase program I think when you look at the Radisson integration costs. In particular, you would just see a sequential quarter over quarter deceleration from Q2 into Q3.
From Q3 into Q4, as I mentioned, probably some immaterial some residual integration that may slip into 2024, just some some of the modest scope that may have gotten deferred but I think from a broad perspective, I think 2024 integration costs would be immaterial when you compare it to what the 2023 cost was.
Thank you.
Thank you.
Thank you.
There are no further questions I will turn the call over to Pat pieces for closing remarks.
Well, thank you operator, and thanks again, everyone for your time. This morning, we will talk to you again in November when we announce our third quarter results I Hope you all have a great day.
Ladies and gentlemen, this does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines.
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