Good day, and welcome to the Wyndham Hotels & Resorts Second Quarter 2018 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Matt Capuzzi, Vice President of Investor Relations. Please go ahead.

Good morning, and thank you for joining us. With me today are Geoff Ballotti, our CEO; and David Wyshner, our CFO. Before we get started, I want to remind you that our remarks today 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. These risk factors are discussed in detail in our Form 10 and other filings with the SEC. 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 are provided in our earnings release, which is available on our Investor Relations website at www.investor.wyndhamhotels.com. Consistent with the information that we shared with you in May, our further adjusted metrics reflect what our results would have looked like if we had completed our spin-off and the acquisition and integration of La Quinta on January 1. With that, I'd like to turn the call over to Geoff.

Thanks, Matt. Good morning, and thanks, everyone, for joining us today on Wyndham Hotels & Resorts' first earnings call as an independent public company. Before getting into the quarter, we'd like to recognize and sincerely thank our over 16,000 team members who have been working harder than ever to deliver the results we announced this morning. It's been a very exciting time for us since spinning off 2 months ago, and we couldn't be more excited about what we've been able to achieve and for the opportunities that lie ahead. We reported a solid second quarter in line with our guidance, with adjusted EBITDA of $125 million and further adjusted EBITDA of $159 million. Our system size grew 12%. And excluding the acquisition of La Quinta and the sale of Knights Inn, our system size grew 3% as our RevPAR increased 4% in constant currency. David, in a moment, will discuss our financial results in much more detail. From a strategic perspective, we announced that we would be expend -- extending the By Wyndham endorsement to all of our brands in over 7,000 hotels worldwide, that we completed our nearly $2 billion acquisition of La Quinta and that we completed our spin-off from Wyndham Worldwide. It's been a very busy and very productive 13 weeks. Today, we'd like to talk about Wyndham Hotels & Resorts' identity, and what we do best about some of the principal messages we've been out sharing with investors and all of you, and about the progress we've made on several key initiatives. Here's how we like to think about our business. We franchise more hotels than any other company in the world, and we are the market leader in both the economy and the mid-scale segments of the global lodging industry. We license our 20…

Thanks, Geoff, and good morning, everyone. Today, I'd like to discuss our second quarter results, which were solid and in line with our expectations as well as the La Quinta integration, our balance sheet and our 2018 outlook. My comments will be primarily focused on our adjusted metrics. You can find our complete results in our earnings release, including reconciliations of adjusted amounts to GAAP numbers and [ walk ] downs of adjusted amounts to further adjusted metrics that reflect what our business would look like if our spin-off and the acquisition and integration of La Quinta had all occurred on January 1. As Geoff mentioned, our mid-quarter acquisition of La Quinta and our mid-quarter spin-off from Wyndham Worldwide make our results and year-over-year comparisons somewhat challenging to interpret this quarter. We believe that the adjusted figures we're providing will be helpful in understanding how our business performed and how it will look on a go-forward basis. Our total revenues grew 31% in the second quarter, including $77 million of incremental revenues from La Quinta. Excluding the acquisition, revenues grew 8%, primarily due to 8% higher royalties and franchise fees as well as a 17% increase in marketing reservation and loyalty fees that, in 2018, included global franchisee conference revenues that were fully offset in EBITDA by conference-related expenses. Adjusted EBITDA increased 19%, primarily reflecting the growth in revenues, partially offset by the timing of marketing expenses. We estimate that if we had completed the spin-off and had acquired and fully integrated La Quinta prior to April, our adjusted EBITDA in the second quarter would have been $159 million, near the high end of our prior projection of $150 million to $160 million. Royalty and franchise fee revenues increased $18 million or 19%, including a 10-point contribution from La Quinta,…

Thanks, David, and thanks again, everyone, for joining us today. We hope you all come away from the call sharing our excitement and enthusiasm for what lies ahead. Our business model, our recent results, our outlook, including the integration of La Quinta, and our growth potential all make us very optimistic about our team's future as an independent public company. Finally, we again want to thank all of our team members for their help and commitment in executing on our spin and on the acquisition and integration of La Quinta, all while delivering Wyndham's legacy, count-on-me service to customers, which continues to be so very central to our culture. And with that, operator, David and I welcome any questions.

[Operator Instructions] We'll take our first question from Joe Greff with JPMorgan.

I have a few questions here. The first question relates to La Quinta. Thank you for the commentary about the development pipeline, you're hitting that 24,000 rooms mark. Can you talk about how La Quinta did in terms of year-over-year RevPAR growth and net rooms growth?

Sure. They are having a great year. We are looking now at their entire system. And in the first quarter, they were up 3.6%. In the second quarter, their RevPAR finished significantly ahead of that, at up 5.7%. In our first month that we had them on our platform, which was June, we saw a 6% RevPAR growth. And we're seeing really solid gains, good gains in their web.com traffic and in the central contribution. And I'd say most importantly, their RevPAR index, which is up systemwide 100 basis points in the quarter.

Okay, great. I just want to talk about the topic of rooms churns, removals, franchisee retention. I know you've talked that it's currently in that 6% range per annum. Can you talk about some of the specifics that you guys are doing to bring that lower? How much of any potential future improvement is tied to the system being cleaned up historically? And more recently, how much of it is related to a better appreciation of where the platform is today versus the past? And what's the time table to maybe bring that down and to kind of get it to, say, more in that 3% to 4% range?

Sure. Thanks, Joe. We have been talking for the last 3 years about our manic focus on quality. And we've removed roughly 80,000 substandard rooms domestically from our system, which were not meeting our brand standards. And if you look at Table 4, you certainly see that year-to-date in terms of the first 6 months, our terminations are still very quality-focused, 90% of those are substandard. We are seeing growth in our domestic system size. I think we're up about 1,000 rooms for the quarter. We continue to be very focused on quality in our economy brands and very focused on trying to raise our quality scores, which we have been doing from our internal ratings with our Medallia scores and external social media scores. And we're seeing great progress and feeling really good about that. And it's great to see internationally as well our master franchisees following our lead, as I touched briefly on, in markets like China to raise those quality standards.

And then a question for David, and this will be my last question. You have further adjusted EBITDA in the 2Q coming in at $159 million. What would be the corresponding net revenue number on that basis, the royalty and franchised fee that corresponds to that? And what would be the corporate expense that corresponds to that, just so we can have a sense of those items with respect to how you disclosed that further adjusted EBITDA?

Joe, I don't have those numbers in front of me right now, but we'll grab those and get back -- we'll get back to you.

We'll go next to David Katz with Jefferies.

I wanted to just focus on -- I know, David, you went through some of the capital allocation avenues, and obviously, priorities will change over time. But if you could elaborate just a bit on what the priorities, at least for the remainder of this year, look like in terms of where you will be allocating capital? And specifically, around the degree to which you would be using capital for key money and other inducements in the development side of the business?

Sure. With respect to the allocation of capital, it's something we spend a lot of time thinking and talking about. Our game plan would continue to be to find good opportunities to deploy $20 million or $25 million-ish of capital for development advances and key money. And I think our run rate so far this year and where our pipeline is running for that sort of activity puts us in a good position to end up somewhere around that range this year. And that's consistent with what we've been targeting. As we think about other uses of cash, as I mentioned, the dividend will -- we expect will be the same over the remainder of this year at $0.25 a quarter or about $50 million in total in the back half. And then it's hard to know or to model exactly what acquisition opportunities are available. We are always looking at tuck-ins that could be attractive to us from both a strategic and financial perspective. And in that context, I think we'd also like to be able to execute some share repurchases consistent with what we did in June with the repurchase of $15 million of stock. If I had to pick a range, it would probably be in the $75 million to $100 million range for the year as a whole, really the June through December period, but I would caveat that by saying that, that number will depend on what tuck-in acquisition opportunities are available to us.

If I can just follow that up 2 ways. One is, if we think about a maximum balance of capital that you would have out in the field for development at any point in time, do you think of it that way? And is there some -- an amount or a ceiling on how much that would be? And then secondarily, if you could just give us the boundaries around what you consider a tuck-in to be. Is that a 8-figure or 9-figure? Where do you consider the top end of size for that?

Sure. Let me work backward through those. I think the prototypical tuck-in acquisition for us is the purchase of AmericInn last year. That was a $140 million transaction that added about 200 properties to our system. It's a great brand from a quality perspective. We think it has significant growth potential. And as a result, it's a prototype for what we'd like to do. I think a transaction of that size, of that order of magnitude, could be double that size, half that size, but in that range could all fit into the tuck-in category. And that's how we think about that.

And David, there's still several single-brand companies as well as many regional players out there that fit that. As David just went through, sort of prototypical fit for us, established, well-perceived brands with growth opportunities in markets like La Quinta that we know we could grow with, with great synergies that are immediately accretive without any owned real estate. That would be a strong strategic fit for us and something that we could integrate, I think.

Yes. And then on the development advance front. Typically, the development advances are forgiven over an extended period of time. And if we assumed a sort of 5-year average life at $25 million a year, that could have us with somewhere in the range of $125 million of capital expended -- extended for those purposes.

Especially with our new contraction brands, David, we have inherited such a phenomenal capability with the new construction development franchise sales team with La Quinta and the new construction architecture design and construction team. They are here today in New Jersey meeting. And these folks are really end-to-end professionals. And they're looking at our new construction brands, which is where our focus is from a pipeline add standpoint. And we built 5 new prototype construction rooms downstairs. It's our Microtel by Wyndham, it's our Wingate by Wyndham, which is now #1 in the J.D. Power rankings. These are the brands that we would use that type of key money for, for the right market.

Got it. And if I can just be clear about one last thing. David, from your comments, I think you may have said $15 million to $20 million of EBITDA per month from La Quinta by mid-'19, which, if I annualize that, is a decent return on the investment so far, but we should expect that, that would accelerate beyond that level over time, correct?

Certainly, we do expect La Quinta to grow over time. I believe the number was $13 million to $14 million in the back half of 2019. And that would be consistent with sort of where La Quinta was running, at nearly $100 million of standalone EBITDA plus synergies of $55 million to $70 million.

We'll take our next question from Patrick Scholes with SunTrust.

Now that you have a couple months of La Quinta in the system, how are you feeling about upside to that original synergy range at this point?

I think it's a little early for us to say. We feel very good about how the integration has been going. And this is a range we really want to stick with. And at this point in time, as we look at the various components, I feel good about what we're able to deliver on the fixed cost side. I feel good about what we're delivering on the variable side in terms of our ability to reduce the rate that various volume-related activities are costing us. And the area where we -- where it's just going to take a little bit longer to be confident about where we're landing or about whether we have any upside associated with the forecast is in the semi-variable cost area, where I think we just need some more time with the business to know exactly where we're going to land on various semi-variable costs. And then the one area that really does continue to be a significant upside for us is on the revenue side. The only revenue synergy we built into the $55 million to $70 million forecast is tied to adding La Quinta on to our existing credit card program. And when we look at our ability to grow the business and expand into -- expand the La Quinta brand significantly into international markets and to grow it in some parts of the country, parts of the U.S. where it's underrepresented, I think that represents upside that's not part of our synergy model.

Okay. And then my second question and perhaps this might be a better question for offline, but it has to do with Table 4, the system size. Certainly, a lot of moving parts to think about, what's the true organic growth rate. The question I have in there, you have in your headline of 3%, looks like net room growth or -- but does that -- or excuse me, since June 30, 2017, did you not also add 11,000 AmericInn rooms in there? And if so, doesn't sort of that organic growth rate be closer to like 1% to 2%? Am I thinking about that correct?

Yes. That's fair. That's fair, Patrick. This is Geoff. Excluding La Quinta and Knights Inn, as you say, our domestic system size was up 3% year-over-year. Reflecting the acquisition of AmericInn and excluding AmericInn, to your point, our domestic system size is up about 1,000 rooms through 6/30.

And our -- when you look at the 3% growth that we've had year-over-year, about half of that comes from the AmericInn acquisition and half of it is organic. And as we look at this, we continue to feel good about our pipeline and its ability to convert in the second half, and that's why we're projecting 2% to 4% rooms growth this year.

Okay. So just to be clear, you're expecting an acceleration due to seasonality timing in the second half versus that first half numbers?

That's right. And there does always tend to be some seasonality associated with this. And you can see that in terms of the strong results we had in the fourth quarter of last year.

And the other thing on Table 4 that folks have pointed out is we are happy with what's happening with our China franchise master license, who has taken to quality to heart. They have grown over -- we acquired this master back in 2004. And they've grown to about 100,000 rooms or they acquired license from us. And they're targeting the bottom 10% of their portfolio. And we talked about the 5,000 rooms that they terminated for quality in Q1. That number was about 3,000 in Q2. We expect that number in Q3 and Q4 to come down and for them to have net room growth in the back, which helps. So we're seeing good growth from China, especially in our direct business, which is -- the team is doing a great job over there. They're up, I think, quarter-on-quarter from 25,000 to nearly 30,000 rooms. We've added 5 brands in that market. And we're seeing growth internationally as well in Southeast Asia and Latin America.

Okay. So we should expect again a pretty material uptick in organic room growth in the back half of the year?

Yes.

We'll take our next question from Stephen Grambling with Goldman Sachs.

I guess I got 2 follow-ups. First, La Quinta looks like the EBITDA did grow -- I want to say it's about 10% year-over-year. I think your prior guidance had included just the 2017 EBITDA, if you can really guide to another public company's numbers. So I guess, how are you thinking about growth and the contribution from that business the rest of the year? And specifically, how that maybe factors into the reiterated full-year EBITDA guidance?

Sure. On La Quinta, as I mentioned, we're really -- we're expecting that to contribute about $9 million to $11 million of EBITDA a month, give or take a little bit for seasonality as we work through the back half of the year. And this -- that includes the system growth as well as the strong RevPAR that La Quinta has been delivering so far this year. So I would say that, that's factored into the numbers that we're providing. And as Geoff mentioned, we've been excited about the RevPAR growth we're seeing on the -- seeing in the La Quinta brand.

And then, I guess, a follow-up on M&A. How important is an established pipeline versus maybe being able to plug into your sales force as you think about potential acquisition opportunities?

I think it's very important. And it gives us great comfort and great credibility with the team that we've inherited from La Quinta that's joining our sales force when you look at just how strong that pipeline is. As David mentioned, 90% of it's new construction, it's established, it's with developers that want to do more, it's with developers that are building our other brands. And to look at a new construction pipeline now of -- that's 70% of our pipe, especially as we continue to focus on new construction and focus on bringing in higher-quality deals, it's very important.

And one last one, if I can sneak it in. I think you alluded to this, but on the revenue synergy side, which is not included, I guess any kind of timing we should be thinking about and milestones or things that you would need to implement before being able to capture those?

I think the -- with respect to La Quinta, as I mentioned, the longest poles in the tent are really the integration of technology and the loyalty program. And I think that's fairly typical in terms of what we see in transactions. But our hope in La Quinta is to have that done within a 12 to 13-month period. And as a result, that puts -- it should put us in good position to deliver full run rate synergies as we move into the second half of 2019.

That's right. Our teams are really focused now and working with the La Quinta team on the technology side. And we expect -- David and I believe our central reservation system cutover to be happening towards the end of the first quarter. And the heavy lifting and the work that's going on through the back half of this year and the first 2 months of 2019 will create for these franchisees a central reservation system that's more distributed and more connected than they've ever had. It's what the La Quinta franchisees are most excited about, is getting off of legacy technology and onto our platform. [indiscernible] will come the loyalty benefits, which are also so important. While we've matched their loyalty program, the La Quinta return program, which has 13 million members, with our award-winning program, the ability to earn and burn points and drive more business direct, which has been our strongest probably-win this quarter in terms of driving more business direct to our franchisees through the Wyndham Rewards program, will also begin to accrue to them towards the end of the first quarter of next year.

And it appears we have no further questions. I would like to return the floor to Geoff Ballotti for closing remarks.

Well, again, thanks, everybody, for joining us today. And Matt and David and I will certainly be available after the call for any follow-up questions. I know we've got 1 to get back on. But again, we're really excited. And we hope everybody will join us in watching the Wyndham Championship coming up on the Golf Channel on CBS in a few short weeks, August 16 to the 19th. And again, thanks for the time today. Thanks, operator.

Thank you. And this does conclude today's Wyndham Hotels & Resorts Second Quarter 2018 Earnings Conference Call. We ask that you disconnect your lines at this time, and have a wonderful day.