Hilton Worldwide Q4 2021 Earnings Results & Report

Hilton Worldwide EPS Results

• Actual EPS: $0.72
• Consensus EPS: $0.71
• Beat/Miss: Beat by +$0.01
• One Year Ago EPS: -$0.10
• EPS Beat Rate: 8 of last 8 quarters

Hilton Worldwide Revenue Results

• Actual Revenue: $1.84 billion
• Expected Revenue: $1.78 billion
• Beat/Miss: Beat by +$60.99 million
• YoY Revenue Growth: +106.30%

Hilton Worldwide (NYSE:HLT) is a global hospitality company that develops, owns, manages, franchises and licenses hotels, resorts and other lodging properties. Its portfolio includes brands such as Waldorf Astoria Hotels & Resorts, Conrad Hotels & Resorts, Hilton Hotels & Resorts, DoubleTree by Hilton, Embassy Suites, Hampton by Hilton, Hilton Garden Inn, Homewood Suites, Home2 Suites and Tru by Hilton.

The company provides accommodations and related services for business and leisure travelers, including guest rooms, meeting and event facilities, food and beverage operations, resort amenities and loyalty program benefits through Hilton Honors. Hilton primarily operates through management and franchise arrangements, allowing independent property owners and developers to use its brands, systems and distribution network.

Founded by Conrad Hilton in 1919, Hilton has grown into an international hospitality group serving travelers across the Americas, Europe, the Middle East, Africa and the Asia-Pacific region. Chris Nassetta has served as Hilton’s president and chief executive officer since 2007.

Hilton Worldwide Q4 2021 Earnings Call Transcript

Key Takeaways

• Strong 2021 recovery: Full-year RevPAR rose 60% and adjusted EBITDA jumped 93% versus 2020, while margins expanded roughly 500 basis points above 2019 peak levels.
• Q4 momentum: RevPAR climbed 104% year-over-year and reached about 87% of 2019 levels, with U.S. RevPAR hitting nearly 98% of 2019 in December as leisure travel surged.
• Optimistic outlook: Hilton expects permanent margin improvements of 400–600 basis points over prior peaks, plans to reinstate its quarterly dividend and resume share buybacks in Q2, and targets mid-single-digit net unit growth in 2022.
• Record development: Hilton opened 414 hotels (67,000 rooms) in 2021, grew net units 5.6%, and ended the year with a 408,000-room pipeline (38% of existing supply), supporting future growth.
• Enhanced guest experience: Launched Digital Key Share and automated complimentary room upgrades, driving a 13% increase in Hilton Honors membership to 128 million and 61% Honors-based occupancy.

Presentation

[Operator]

Good morning, and welcome to the Hilton fourth quarter 2021 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's prepared remarks, there will be a question-and-answer session. To ask a question, you may press star, then one on your telephone keypad. Please note, this event is being recorded. I would now like to turn the conference over to Jill Slattery, Senior Vice President, Investor Relations and Corporate Development. You may begin.

[Jill Slattery, SVP of Investor Relations and Corporate Development at Hilton Worldwide]

Thank you, Chad. Welcome to Hilton's fourth quarter and full year 2021 earnings call. Before we begin, we would like to remind you that our discussions this morning will include forward-looking statements. Actual results could differ materially from those indicated in forward-looking statements, and forward-looking statements made today speak only to expectations as of today. We undertake no obligation to update or revise these statements. For a discussion of some of the factors that could cause actual results to differ, please see the Risk Factor section of our most recently filed Form 10-K. In addition, we will refer to certain non-GAAP financial measures on this call. You can find reconciliations of non-GAAP to GAAP financial measures discussed in today's call in our earnings press release and on our website at ir.hilton.com.

[Jill Slattery, SVP of Investor Relations and Corporate Development at Hilton Worldwide]

This morning, Chris Nassetta, our President and Chief Executive Officer, will provide an overview of the current operating environment. Kevin Jacobs, our Chief Financial Officer and President, Global Development, will then review our fourth quarter and full year results. Following their remarks, we will be happy to take your questions. With that, I'm pleased to turn the call over to Chris.

[Chris Nassetta, President and CEO at Hilton Worldwide]

Thank you, Jill. Good morning, everyone, and thanks for joining us today. As our results show, we made significant progress in our recovery throughout 2021. We saw a meaningful increase in demand for travel and tourism, and our team members around the world were there to welcome guests with our signature hospitality as they look to reconnect and create new memories. We continued to demonstrate our resiliency by remaining laser-focused on providing reliable and friendly service to our guests, and by launching several new industry-leading offerings to provide them even more choice and control. We also continued to expand our global footprint, adding even more exciting destinations to our portfolio and achieving a record year of room openings. All of this, together with our resilient business model, translated into solid results. For the full year, we grew RevPAR 60% and adjusted EBITDA 93%.

[Chris Nassetta, President and CEO at Hilton Worldwide]

Both RevPAR and adjusted EBITDA were approximately 30% below 2019 peak levels. More importantly, our margins were 500 basis points above 2019 peak levels, reaching roughly 66% for the full year. While some costs will come back in as we continue to recover, we remain extremely focused on cost discipline. Given our asset-light business model and the actions we took during the pandemic to further streamline our operations, we expect permanent margin improvement versus prior peak levels in the range of 400-600 basis points over the next few years. Turning to results for the quarter, RevPAR increased 104% year-over-year, and adjusted EBITDA was up 151%. RevPAR was roughly 87% of 2019 levels, with ADR nearly back to prior peaks.

[Chris Nassetta, President and CEO at Hilton Worldwide]

Compared to 2019, occupancy improved versus the third quarter, with higher demand across all segments. Strong leisure over the holiday season drove U.S. RevPAR to more than 98% of 2019 levels for December. Business travel also improved sequentially versus the third quarter, with solid demand in October and November before the Omicron variant weighed on recovery in December. For the quarter, business transient room nights were approximately 80% of 2019 levels. Group RevPAR improved 11 percentage points over the third quarter to roughly 70% of 2019 levels. Performance was largely driven by strong social business while recovery in company meetings and larger groups continued to lag.

[Chris Nassetta, President and CEO at Hilton Worldwide]

As we kicked off the new year, seasonally softer leisure demand, coupled with incremental COVID-19 impacts due to Omicron, the Omicron variant, tempered the positive momentum we saw through much of the fourth quarter. For January, system-wide RevPAR was approximately 75% of 2019 levels. Despite some near-term choppiness, we remain optimistic about accelerated recovery across all segments throughout 2022. We anticipate strong leisure trends to continue again this year, driven by pent-up demand and nearly $2.5 trillion of excess consumer savings. Our revenue position for Presidents' weekend is 7 percentage points ahead of 2019 levels, and our position for weekends generally is up significantly for the year, both indicating continued strength in leisure travel. Similarly, we expect growth in GDP and non-residential fixed investment, coupled with more flexible travel policies across large corporate customers to fuel increasing business transient trends.

[Chris Nassetta, President and CEO at Hilton Worldwide]

As a positive indication of business transient recovery, at the beginning of January, midweek U.S. transient bookings for all future periods were down 13% from 2019 levels and improved to just down 4% by the end of the month. Additionally, STR projects U.S. business transient demand will return to 92% of pre-pandemic levels in 2022. On the group side, our position for the year has remained steady as Omicron related disruption was largely contained to the first quarter of 2022, with most events rescheduled for later in the year. We continue to expect meaningful acceleration in group business in the back half of the year, as underlying group demand remains strong. Compared to 2019, our tentative booking revenue is up more than 25%.

[Chris Nassetta, President and CEO at Hilton Worldwide]

Additionally, meeting planners are increasingly more optimistic, with forward bookings trending up week over week since early January. Overall, we remain very confident in the broader recovery and our ability to keep driving value on top of that. This should allow us to generate strong free cash flow growth, and our expectation is to reinstate our quarterly dividend and begin buying back stock in the second quarter. Turning to development, we opened more than a hotel a day in 2021, totaling 414 properties in a record 67,000 rooms. Conversions represented roughly 20% of openings. We achieved net unit growth of 5.6% for the year, above the high end of our guidance, and added approximately 55,000 net rooms globally, exceeding all major branded competitors.

[Chris Nassetta, President and CEO at Hilton Worldwide]

Our outperformance reflects the power of our commercial engines, the strength of our brands, and our disciplined and diversified growth strategy. Fourth quarter openings totaled more than 16,000 rooms, driven largely by the Americas and Asia Pacific regions. In the quarter, we celebrated the opening of our 400th hotel in China and our first Home2 Suites in the country. This positive momentum continued into the new year with the highly anticipated opening of the Conrad Shanghai just last month, marking the brand's debut in one of the world's busiest and most exciting markets. During the quarter, we also continued the expansion of our luxury and resort portfolios with the opening of the Conrad Tulum and the new all-inclusive Hilton Cancun. With more than 400 luxury and resort hotels around the world and hundreds more in the pipeline, we remain focused on growing in these very important categories.

[Chris Nassetta, President and CEO at Hilton Worldwide]

We were also thrilled to welcome guests to the Motto New York City Chelsea, a major milestone for this quickly growing brand and a perfect addition to Hilton's expanding lifestyle category. This hotel exemplifies what it means to be a lifestyle property. It incorporates unique and modern design elements and provides guests with authentic and locally-minded experiences. We also celebrated the first lifestyle property in Chicago with the opening of the Canopy Chicago Central Loop and debuted the brand in the U.K. with the opening of the Canopy London City. These spectacular properties joined recently opened Canopy hotels in Paris, Madrid, and São Paulo. In 2021, we grew our Canopy portfolio by more than a third year-over-year, opening hotels across all major regions.

[Chris Nassetta, President and CEO at Hilton Worldwide]

We ended the year with 408,000 rooms in our development pipeline, up 3% year-over-year, even after a record year of openings. Our pipeline represents an industry-leading 38% of our existing supply, giving us confidence in our ability to deliver mid-single-digit net unit growth for the next couple of years, and eventually return to our prior 6%-7% growth range. For this year, we expect net unit growth to be approximately 5%. As our guests' travel needs continue to evolve, we again introduced innovative ways to enhance the guest experience. In the quarter, we announced the launch of Digital Key Share, which allows more than one guest to have access to their room's digital key via the Hilton Honors app.

[Chris Nassetta, President and CEO at Hilton Worldwide]

To further reward our most loyal Hilton Honors members, we introduced automated complimentary room upgrades, notifying eligible members of upgrades 72 hours prior to arrival. With our guests at the heart of everything we do, we've been thrilled to hear that the early feedback for both industry-leading features has been overwhelmingly positive. In the quarter, Hilton Honors membership grew 13% year over year to more than 128 million members. Honors members accounted for 61% of occupancy in the quarter, just a few points below 2019 levels, and engagement continued to increase across members of all tiers. We work hard to ensure that our hospitality continues to have a positive impact on the communities we serve. For that reason, we're incredibly proud to be recognized for our global leadership in sustainability.

[Chris Nassetta, President and CEO at Hilton Worldwide]

For the fifth consecutive year, we were included on both the World and North America Dow Jones Sustainability Indices, the most prestigious ranking for corporate sustainability performance. Overall, I'm extremely pleased with the progress we've made over the last year, and I'm very confident that Hilton is better positioned than ever to lead the industry as we enter a new era of travel. With that, I'll turn the call over to Kevin to give you more details on the quarter.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

Thanks, Chris, and good morning, everyone. During the quarter, system-wide RevPAR grew 104.2% versus the prior year on a comparable and currency neutral basis. System-wide RevPAR was down 13.5% compared to 2019 as the recovery continued to accelerate across all segments and regions, driven by border reopenings and strong holiday travel demand. Performance was driven by both occupancy and rate growth. Adjusted EBITDA was $512 million for the fourth quarter, up 151% year-over-year. Results reflect the continued recovery in travel demand. Management and franchise fees grew 91%, driven by strong RevPAR improvement and license fees. Additionally, results were helped by continued cost control at both the corporate and property levels.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

Our ownership portfolio posted a loss for the quarter due to the challenging operating environment and fixed rent payments at some of our leased properties. Continued cost discipline mitigated segment losses. For the quarter, diluted earnings per share, adjusted for special items, was $0.72. Turning to our regional performance, fourth quarter comparable U.S. RevPAR grew 110% year-over-year and was down 11% versus 2019. The U.S. benefited from strong leisure demand over the holidays, with transient RevPAR 1% above 2019 levels and transient rate nearly 5% higher than 2019 for the quarter. Group business also continued to strengthen throughout the quarter, with December room nights just 12% off of 2019 levels.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

In the Americas outside of the U.S., fourth quarter RevPAR increased 150% year-over-year and was down 17% versus 2019. Continued easing restrictions and holiday leisure demand drove improving trends throughout the quarter. Canada continued to see steady improvement as borders remained open to vaccinated international travelers. In Europe, RevPAR grew 306% year-over-year and was down 25% versus 2019. Travel demand recovered steadily through November, but stalled in December as a rise in COVID cases led to reimposed restrictions across the region. In the Middle East and Africa region, RevPAR increased 124% year-over-year and was up 7% versus 2019. Performance benefited from strong domestic leisure demand and the continued recovery of international inbound travel as restrictions eased.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

In the Asia Pacific region, fourth quarter RevPAR fell 1% year-over-year and was down 34% versus 2019. RevPAR in China was down 24% as compared to 2019 as travel restrictions and lockdowns remained in place. However, occupancy in the country held steady versus the third quarter as summer leisure travel was replaced with local, corporate, and meetings business. The rest of the Asia Pacific region benefited from relaxed COVID restrictions and the introduction of vaccinated travel lanes in several key markets. Turning to development, as Chris mentioned, for the full year, we grew net units 5.6%. Our pipeline grew sequentially and year-over-year, totaling 408,000 rooms at the end of the quarter, with 61% of pipeline rooms located outside the U.S. and roughly half under construction.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

Demand for Hilton-branded properties remains robust, and along with our high-quality pipeline, we are positioned to emerge from the pandemic stronger than ever. Turning to the balance sheet, we ended the year with $8.9 billion of long-term debt and $1.5 billion in total cash and cash equivalents. We're proud of the financial flexibility we demonstrated through the pandemic and remain confident in our ability to continue to be an engine of opportunity and growth as we look to reinstate our capital return program. Further details on our fourth quarter and full year results can be found in the earnings release we issued this morning. This completes our prepared remarks. We would now like to open the line for any questions you may have. We would like to speak with all of you this morning, so we ask that you limit yourself to one question. Chad, can we have our first question, please?

[Operator]

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. The first question will be from Shaun Kelley with Bank of America. Please go ahead.

[Shaun Kelley, Senior Research Analyst and Managing Director at Bank of America]

Hi, good morning, everyone.

[Chris Nassetta, President and CEO at Hilton Worldwide]

Good morning, Shaun.

[Shaun Kelley, Senior Research Analyst and Managing Director at Bank of America]

Morning, Chris. I wanted to dig in a little bit. I thought the margin commentary you gave was interesting, Chris. I mean, you know, in general, I think we think of hotels being more about recovery beneficiaries than we do is thinking, you know, through the pandemic and some of the opportunities that may have presented on the cost side. Could you just give us a little bit more color on what some of the key buckets are that have changed, you know, in your overall operating model that are driving that improvement? Then, you know, secondarily, just help us think through, you know, how that might trend over the next couple of years, you know, in as you kind of ramp up towards that 500 basis point margin target that you mentioned.

[Chris Nassetta, President and CEO at Hilton Worldwide]

Yeah, I'm happy to do it. We put it in the comments because the truth is, it's very important, I would argue. I don't think it's had a lot of focus, and it has an intense amount of focus inside this company, among the management team, and for that matter, with our board of directors. Because the idea was, as you would wanna do in any crisis, is take advantage of opportunity. As we went into the crisis, we saw things that we thought, you know, we not only needed to do to address the crisis, but we could do to make the business stronger. We didn't obviously have a lot to worry about liquidity. We had a lot to worry about, but our balance sheet was great. We didn't have a lot of liquidity issues.

[Chris Nassetta, President and CEO at Hilton Worldwide]

We very quickly, not to pat us on the back, but it's true, you know, like in March, April of 2020, we were focused on recovery. How do we get to the other side? What are the things that we can do to make this business faster growing, better, stronger, and higher margin? We've been at it ever since, and we'll never stop, you know, because we, you know, think there are opportunities. I think if you did the math, it sorta comes in three categories that get you there. Number one, we're bigger. You have, you know, units that have been added, you know, at 5+% a year through COVID that haven't been during COVID that productive that are over the next few years gonna become productive contributors to earnings.

[Chris Nassetta, President and CEO at Hilton Worldwide]

We've had great success in our you know sort of license arrangements and you know sort of our non-RevPAR-related fee segment of the business. Think you know our HGV business. Think you know our Amex but you know co-brand business generally where you know we you know. It's a very very high margin business and it's you know it has performed very well. You know if you look at the numbers carefully 2021 we were already over peak levels for those fees peak 2019 levels and we think there's still meaningful growth you know to come from that. Then last but not least importantly cost structure.

[Chris Nassetta, President and CEO at Hilton Worldwide]

You know, we, like everybody, every business that was dramatically impacted by COVID, had to think about cutting costs in hotels and in corporate, and we did that. Again, not patting us on the back, but reality is we said, like, we don't wanna just take costs out. We wanna sort of re-engineer the way we run the business to be able to, where we think there might be longer term efficiencies, realize those, and during COVID, sort of get, you know, build it into the DNA of the company. We were able to take out, you know, a bunch of costs that helped during COVID, but that, you know, that we think we will be able to keep out.

[Chris Nassetta, President and CEO at Hilton Worldwide]

When you put all that together, as we said, we think it's, you know, 400-600 basis points of sort of real run rate margin improvement. We delivered pretty well against, I thought last year, when we had RevPAR and EBITDA that was 30% off of peak levels, and delivering 500 basis point margin levels was pretty compelling as a down payment on what we're saying. Now, it won't be a perfectly straight road, meaning, you know, there are. Last year, you know, we probably underspent in some areas 'cause it's been hard to hire and all that. Corporately, this year we'll catch up a little bit with that. So, you know, you, it won't be, you know, it won't be a completely straight line.

[Chris Nassetta, President and CEO at Hilton Worldwide]

As you look out to, like, 2023 and 2024, you know, I think we're, you know, we're in those target ranges, hopefully at the midpoint or beyond those, at least as we model it. As I said, it's not by happenstance. It's not by luck. It's been a huge focus, and I think shareholders should feel comfortable that it will remain an intense focus of the enterprise. 'Cause we know we can, and if we can, we should, because ultimately I won't finish this, 'cause I'm sure others have questions that we wanna have answered. Ultimately, obviously, in a normal time, we're a free cash flow machine. The higher the margins, the higher the free cash flow. Having 500 basis points higher margins allows us to drive a lot more free cash flow. That allows us to return a lot more capital over time. As I said in my prepared comments, we intend to start returning capital in the second quarter. That is the second quarter of this year. That is, you know, six weeks from now.

[Shaun Kelley, Senior Research Analyst and Managing Director at Bank of America]

Thank you very much.

[Operator]

Thank you. The next question will come from Joe Greff with JPMorgan. Please go ahead.

[Joe Greff, Managing Director at JPMorgan]

Good morning, everybody.

[Chris Nassetta, President and CEO at Hilton Worldwide]

Morning, Joe.

[Joe Greff, Managing Director at JPMorgan]

I have a two-part question on development. One, you know, it's hard not to notice that, you know, the managed footprint has, you know, caught up, you know, at least relative to the growth rate into 2019. How do you see, you know, the footprint growth between managed and franchise growing in 2022? I know you talked about 5% this year, longer term, 6%-7%. Then can you also just talk about, you know, what's going on development wise in China currently? Thank you.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

Yeah, sure, Joe. I'll take this one. I think, you know, it's interesting. I'm not exactly sure what numbers you're looking at. I think our split between, you know, managed and franchised as the pipeline plays out, you know, has been pretty consistent, right? Our existing supply is 75% franchised, you know, led by the U.S. and the Americas, of course. You know, more and more, you know, our pipeline today is, you know, 40% franchised outside, you know, in EMEA and nearly half franchised in APAC as our franchising business grows in those regions. Over time, what had been happening is, you know, growing outside the U.S., more of those deals had been managed and that was sort of skewing us back towards managed.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

Now I'd say, you know, we're on a trajectory overall, you know. We'll still add a bunch of managed rooms as we grow outside the U.S., but more and more we're doing franchising, you know, outside of the U.S. Maybe I'm missing something in your question, and I'm happy to do a follow-up, but I think that's been pretty consistent and not really moving around that much. Interestingly, you know, feel free to follow up, but to get to China, it's interesting. Most of the development trends, and I think we've said this on prior calls, have been following the trend of the virus. Meaning, as the world's been opening up in those regions, you see a pretty direct correlation to signing activity and approval activity in those regions.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

Led by the U.S., Europe had sort of a slow start, you know, this year, but then really came on towards the end of the year as things started to open up. China's been kind of the exception to that rule, meaning even with lockdowns and people not moving around, and you would think not being able to travel across the country would slow the pace of activity, but that just hasn't been the case. For us, you know, our approvals for 2021 were up 45% in 2021 for the year, and our openings were up 30% over the year. We think our openings will be up something similar to that over the course of 2022. China has really been strong, you know, led by our Plateno Hampton JV. We've now launched Home2 with Country Garden, we've now launched, you know, on our own individual franchising program for Hilton Garden Inn with still a bunch of really great, you know, full service and luxury signings along the way. Chris mentioned a little bit in our prepared remarks. China's been a little bit of the exception to the rule with COVID, where even in the face of lockdowns, we've had a lot of activity.

[Joe Greff, Managing Director at JPMorgan]

Great. You answered it. Thanks, Kevin.

[Operator]

The next question will come from Thomas Allen with Morgan Stanley. Please go ahead.

[Thomas Allen, Managing Director at Morgan Stanley]

Thank you. Just to follow up to Shaun's question, maybe a clarification. As I look at 2024 consensus for you, the Street's looking for $3.1 billion of EBITDA and 70% margin. You know, your comment earlier, Chris, was, you know, we're gonna gain 400-600 basis points of margin versus 2019, which has you know, in that 65%-66% range. Do you think, you know, what do you think The Street's modeling or mismodeling? Thank you.

[Chris Nassetta, President and CEO at Hilton Worldwide]

I have no earthly idea. As you know, we haven't been giving guidance for any period of time let alone for 2024. Thomas, I think the best thing to do is let my comments stand as they were. You know, we're confident that on a run rate basis, it'll sort of be in that range. We're very proud of that, of being able to accomplish that. Obviously we're always looking to under promise and over deliver, so that will never change. Not much to add at this point.

[Thomas Allen, Managing Director at Morgan Stanley]

All right. Chris, just, I mean, I guess asked another way. Two things I was thinking of when you said it. One, you know, there's obviously gonna be a mix shift of the lower margin owned business coming back. And then secondly, you know, when we look at your margins historically, it, you know, they increase every single year. So I guess the point I'm making is I think your commentary around margins is more your confidence around, you know, resetting margins higher versus, you know, commentary that, you know, your expense base will grow significantly and you're kind of stuck at a margin level. Is that the right way to think about it?

[Chris Nassetta, President and CEO at Hilton Worldwide]

I'm not sure I understand, but I think so. Yeah. I mean, we have confidence. Said another way, just to be clear, we have confidence that the structural changes we have made to the company on a like-for-like basis are gonna drive higher margins. So if you think that margins are gonna continue to grow organically under the prior setup, then we, you know, then we agree with that. We think that there's an incremental piece to it that is a result of structural changes that we've made that we'll maintain.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

Yeah [crosstalk].

[Thomas Allen, Managing Director at Morgan Stanley]

Thank you.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

I'd probably just add to that quickly on the real estate. Like, you're making a comment about the mix of business, but you should remember that the real estate's been shrinking over time. You know, even though you've got different rates of recovery in COVID and different mix, over time, that is gonna continue to be a smaller part of the business as we continue to grow the management franchise business and continue to work our way out of the real estate.

[Chris Nassetta, President and CEO at Hilton Worldwide]

Yeah. Not to beat a dead horse, but to just throw something slightly more on top of the real estate. The real estate, you're right, is a lower margin business by definition. We have baked that into what we, you know, our guidance, my summary of what our expectation is over the next few years. That was taken into account. It also, from an EBITDA growth point of view, will be tremendously helpful because it was so beat up given the structure of how much of it is held, that from an EBITDA growth rate point of view over the next few years, real estate's gonna be, you know, very, very helpful.

[Thomas Allen, Managing Director at Morgan Stanley]

Higher growth. Yeah.

[Chris Nassetta, President and CEO at Hilton Worldwide]

Very high growth.

[Thomas Allen, Managing Director at Morgan Stanley]

Thanks for the clarification.

[Operator]

The next question will come from Smedes Rose with Citigroup. Please go ahead.

[Smedes Rose, Director at Citigroup]

Hi. Thanks. I wanted to ask a little bit more about your thoughts on China, and maybe you could just give us a reminder of what kind of contribution China made to fees in 2019, and maybe kind of how far that fell off in 2021, just 'cause it seems like there is an opportunity for some significant rebounding. You know, maybe it sounds like it's running behind kind of the rest of the world. If you have any kind of thoughts on maybe how China addresses its policy around COVID going forward, or if they keep the kind of zero tolerance in place indefinitely.

[Chris Nassetta, President and CEO at Hilton Worldwide]

Yeah. I think China. I'm doing this from memory. I think China in 2019 was like 5% of EBITDA overall. I would guess at this point it is less than half of that. I'm looking at Jill, it's probably 2% or something like that. I think you're right. You know, there's a significant. I mean, by the way, that's true for the entire international estate when you think about it. Our Asia Pacific business, our Europe business, they've all been slower to return. Our EBITDA, if you looked at 2020 and 2021, was crazy, disproportionately U.S. based, and those numbers aren't fully back to where they were. I mean, we were like 73% U.S.

[Chris Nassetta, President and CEO at Hilton Worldwide]

I think in 2020 we were like 94%-95%, and last year we were like, you know, 83% or something. It's coming back, you know, and will ultimately return to a more normalized kind of environment, which means not just China, but the whole world. Whole world outside of the U.S., you know, has some significant growth potential as we get to a more normalized environment. In terms of the reasons generally, and I'll end on China, and an opportunity to just talk about sort of the rhythms of what's going on, most of which I think is pretty well known because you guys have a lot of data.

[Chris Nassetta, President and CEO at Hilton Worldwide]

You know, if you look at what's going on in the world, the Middle East, which is not a huge part of our business, is sort of leading the world. I mean, you saw our numbers for the fourth quarter. Middle East is already meaningfully above 2019 levels. So they're sort of ahead in recovery. We think that will continue. The U.S., I would say, is sort of, you know, next, and maybe I'll leave it to another question. You know, our belief is you will see in the second quarter a transition and then very rapid recovery, you know, all our earlier prepared comments.

[Chris Nassetta, President and CEO at Hilton Worldwide]

In the second half of the year, I think Europe will be quick to follow, you know, in the sense that it's more complicated because you have more countries. The restrictions aren't just one set of restrictions, but you can start to see it sort of sweeping through Europe, opening, sweeping through Europe. Now, Asia-Pacific, I think will lag in large part, because of China and the policies they've had.

[Chris Nassetta, President and CEO at Hilton Worldwide]

My own view, and that's all it is. It's not, you know, because of insider knowledge, is that as the rest of the world opens and as we get, which I think we are rapidly approaching, an endemic stage of COVID, I think there'll be a lot of pressure economically, culturally, and otherwise for China to open up much like the rest of the world. It'll lag, but I think it'll be a fast follow. I think Europe and then Asia will be a fast follow. My own view, as we get to the second half of the year, I think you're in an entirely different environment across the globe. Meaning, you know, within the first half of the year, you're gonna see things evolving at a slightly different pace. I think when you get to the second half of the year, you know, the whole world broadly is gonna be a lot more open than anything we've seen in two years.

[Smedes Rose, Director at Citigroup]

Great. Thank you.

[Operator]

The next question is from Stephen Grambling with Goldman Sachs. Please go ahead.

[Stephen Grambling, VP at Goldman Sachs]

Hi. Thanks. I'd like to come at margins from maybe the perspective of your owners, which is always key to driving that overall flywheel. How are you thinking owner margins will progress versus pre-pandemic? Could you tie in how you envision the hotel experience will structurally change, whether it's longer stays, charging or opt-in for cleaning or reducing non-consumer facing labor? Where do you see the greatest opportunity for investing back into your owners to improve the experience amidst some of these shifting preferences? Thanks.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

Yeah, good question, Stephen. A little bit to unpack there, but I'll sort of try to go in order. I think if you take a step back to the beginning of the pandemic, I think, you know, we did a really good job in the pandemic leading the way with, you know, starting out early on, advocating for our owners, whether that was, you know, for government assistance or otherwise, being really flexible with standards, you know, as the business sort of, you know, fell apart a little bit. And through recovery, you know, sort of similar to what Chris has been talking about of, you know, really taking the opportunity of COVID to drive improvement through our enterprise. We've been doing the same thing at the property level, right?

[Kevin Jacobs, CFO and President of Global Development at Hilton]

It's, you know, certain big things you mentioned by being innovative with, you know, re-engineering our food and beverage and, you know, particularly breakfast offerings, looking at housekeeping, you know, and opt-in there. Then a bunch of little things across, you know, line item by line item, sort of literally grinding through the P&Ls and standards with our owners to help them, you know, help the properties be more profitable through COVID and using that opportunity to make sure that that profitability and those efficiencies stand going forward. Now, you know, people talk about, you know, we do need service recovery, right? It has been hard to hire labor. You know, we do need to bring some of those service standards back. Obviously, everybody knows what's going on with inflation and wage inflation.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

Of course, the flip side of that on inflation is that helps on the revenue line, right? We reprice the rooms every night. If inflation is a headwind on the cost side, it's gonna be a tailwind on the revenue side. The revenue base is obviously bigger than the expense base, and so that ought to lead to higher margins coming out the other side. When you put that all together, we think we can do a better job for customers, give them what they want, take away what they don't want and what they won't pay for, and use, you know, driving revenue through an inflationary environment to get our owners to be higher margin businesses coming out the other side.

[Stephen Grambling, VP at Goldman Sachs]

Helpful. Thank you.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

Sure.

[Operator]

The next question is from Patrick Scholes with Truist Securities. Please go ahead.

[Patrick Scholes, Managing Director of Lodging and Leisure Equity Research at Truist Securities]

Hi. Good morning, everyone.

[Chris Nassetta, President and CEO at Hilton Worldwide]

Morning.

[Patrick Scholes, Managing Director of Lodging and Leisure Equity Research at Truist Securities]

Morning. You know, when I try to think about some things that have perhaps permanently changed or at least changed from 2019, you know, I'm wondering what your thoughts are on the degree of key money that you're giving today for new hotels under your brand, number one. You know, how have the franchise contracts changed? Are they more flexible today versus pre-COVID, less flexible? Just like to hear your thoughts on those. Thank you.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

Yeah. I think I'll start with the second part. I mean, really, there's nothing different about our franchise agreements, you know, pre-now versus pre-COVID. It's a very well, you know, it's a business that's been around for a long time. You know, the protocols are established, the franchise documents, you can read them, they're public. They haven't really changed over time. I think, you know, when it comes to key money, I mean, you could see in our numbers this year that it's been sort of higher than it had been in the past. I think that's a function of. You know, a little bit of. I don't think it's COVID versus pre-COVID. It's a competitive environment out there, so there's definitely competition.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

You know, we're leading the way in growth, and our competitors are trying to catch up to us, so that makes for competition. The reality is our number of deals that have key money associated with them is about 10%. That's what it was pre-COVID-19, that's what it is today. There's you know, that's been pretty consistent. We've just been fortunate, you know, over the last particularly year or so, we've signed some really high-profile deals. You know, I think about, you know, the Waldorf Astoria, Monarch Beach in California. I think about Resorts World in Las Vegas. You know, the deal we did in Cancun and Tulum. You know, those have been deals that we've been working on for a really long time. They're very strategic.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

They happen to be a little bit higher, you know, key money associated with them than we're used to, and so we've been a little bit higher. You know, that trend maybe continues for a little while longer. We have some strategic things in the hopper at the moment that I think might keep that number a little bit elevated over the course of 2022 and maybe even for a little while beyond that. What I'd say sort of in closing, and hopefully that sort of covers it, and, you know, Chris may wanna add to this a little bit, is, you know, relative to our peers, I think we stack up really favorably in terms of what we've been deploying for capital to get to our level of growth, I think, has been exemplary.

[Operator]

Thank you. The next question will come from Rich Hightower with Evercore. Please go ahead.

[Rich Hightower, Managing Director of US REIT Research at Evercore]

Hi, good morning, everybody.

[Chris Nassetta, President and CEO at Hilton Worldwide]

Morning.

[Rich Hightower, Managing Director of US REIT Research at Evercore]

I want to go back to a portion of the prepared comments. And Chris, I think you mentioned it was STR's forecast. I know this is not a Hilton forecast, but for business transient demand, I think to get to the low-90s as a percentage of of pre-COVID levels this year. Again, not your forecast, but I am wondering, you know, if you could take me through the building blocks in your mind as to perhaps how we might get to that level by the end of this year, you know, especially in the context of hybrid workforces, work from home, and so forth.

[Chris Nassetta, President and CEO at Hilton Worldwide]

Yeah, it isn't our forecast, but I do buy into it, and I think actually it might be even better than that, personally. My own opinion. I think there's a really good chance on a run rate basis that we will end up back at or above where we were in 2019 before the year is out. So why do I think that? One, there's a lot of pent-up demand. That obviously helps. Omicron created more pent-up demand 'cause a lot of people didn't do trips. But you know, I can't speak for the industry. I can speak for us. You know, we're out talking to customers all the time, you know, sort of large, medium, small.

[Chris Nassetta, President and CEO at Hilton Worldwide]

What you find is, like, you know, heretofore during the crisis, the largest corporate customers have been way off on travel. So they've been like 80% [inaudible] I'd say through the third and fourth quarter they were 70%-80% off still. But what happened is that SMEs, small medium enterprises, were out traveling like crazy. I've given these stats before on calls. Pre-COVID, 80% of our business transient was SMEs. 20% of it, or 10% of the overall business was large corporate. So it's not that we don't love them or and we don't want them, but we were never, you know, ultimately that dependent on that. So what happened in COVID for us is, again, I'm back to what I said in my earlier comments.

[Chris Nassetta, President and CEO at Hilton Worldwide]

We were in March or April of 2020 saying like, ll right, what do we do? Where do we pivot? How do we retool our sales force for getting whatever business is out there?" What we found, not surprisingly, is the large corporates disappeared, but the SMEs were still out there, maybe not like they are now, but they were out there more than others. Why? Because they're small and medium. They had to. Like, they die if they, you know, their business requires it, and so they have to be out there. We pivoted a whole bunch of our infrastructure and sort of like retooled our entire sales force to make sure that we didn't abandon the large corporates and those relationships.

[Chris Nassetta, President and CEO at Hilton Worldwide]

We kept our entire sales team on, you know, on payroll during the whole crisis, which was unlike, I think, a bunch of our competitors. We did say, you know, we need to, like, reorient how we're focusing our time. We've done, you know, with all. Again, I feel like I'm patting us on the back. We've done a really good job. We have replaced, we think, probably already half of, you know, what that corporate business was that went away. I think the corporate business is gonna come back. You don't have to believe it's all gonna come back, but the idea is one plus one, I think, can equal three, right?

[Chris Nassetta, President and CEO at Hilton Worldwide]

Meaning, you know, pivoting even harder to have a larger demand base to put in the top of the funnel of SMEs, along with corporates coming back gradually, is just gonna give us an opportunity to price demand in a way that I think will be superior to what we could price it before. Last comment I'd make is that people think about SMEs versus the big corporates, and no offense to all the big corporates that are on this call, but the reality is you guys pay less. The SMEs, I mean, if you look at the rate structure of SMEs, it's like 15%+ on average higher because the big corporates beat us up more. They beat everybody up, and we discount more.

[Chris Nassetta, President and CEO at Hilton Worldwide]

The reality is not only is there more of it that's been out there and we've retooled to go after more of it, but the reality is it's at a higher price too. That's why I believe in what STR's saying or better, is because I do think throughout this year, as you release pent-up demand, given our you know, access to SMEs that have been very robust and our and we have more of them. Corporates are definitely starting to come back. Talked to every travel manager in the country, which we do, and they're coming back. When you put all those When you put all those pieces together, I think it's pretty easy to believe as you get to the, particularly the second half of the year, you're gonna be in a very different and a very positive environment.

[Rich Hightower, Managing Director of US REIT Research at Evercore]

All right. Helpful. Thank you.

[Chris Nassetta, President and CEO at Hilton Worldwide]

Yep.

[Operator]

The next question is from Richard Clarke with Bernstein. Please go ahead.

[Richard Clarke, Senior Analyst at Bernstein]

Thanks very much for taking my questions. Just wanna ask a question about the kind of construction environment. I notice your percentage of pipeline that's under construction has dropped below 50% for the first time in quite a while. Is that just phasing? Does that feed into this year's guide on unit growth, or does that mean we maybe can't expect a recovery in 2023 to return to the normal 6%-7% takes a little bit longer?

[Kevin Jacobs, CFO and President of Global Development at Hilton]

Yeah. Richard, I think, look, that's a slight decrease, you know, almost a rounding error in terms of our amount under construction. It really sort of rounded to half before, it rounds to half now. If you look at the industry data, you know, from STR, it's down actually a lot more than that. We're doing a really good job of both getting and keeping things under construction. I'd say, you know, the way to think about the trajectory is we actually think we'll start more rooms this year than we started last year. In the U.S., which is our largest market, we think we have one more year where it's gonna decline slightly, and 2022 is probably the bottom. That does play into our forward-looking forecast.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

Of course, that's just a function of largely input costs, right? If construction costs overall are sort of up year-over-year at the moment in the mid-teens, you know, raw materials costs and labor cost inflation is not something that should surprise anybody on this call. That's sort of a thing going on globally, especially in the U.S. That does all play into our outlook. We've actually never said, you know, publicly when we think we'll get back to our prior 6%-7% level. But, you know, given what's going on now, it probably takes two or three years to get back to that level. We think, again, 2021 was the bottom globally for starts. You know, this year, 2022 in the U.S., we think we'll recover from there.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

You gotta start them to deliver them, right? We have to have starts recover to be able to get back to that prior level of net unit growth. You are seeing that sort of affect our outlook both for this year and beyond. I guess the last thing I'd say on that is even with everything that's been going on in the world, you know, for now a two year pandemic with the world blowing sky high, we're still delivering 5+% net unit growth. We still think we'll deliver at that rate through this development lag that's gonna come from the pandemic, and then we'll recover from there. We think that's actually pretty good evidence of the resiliency of the business and the resiliency of our ability to grow.

[Richard Clarke, Senior Analyst at Bernstein]

Very helpful. Thanks so much.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

Sure.

[Operator]

The next question is from David Katz with Jefferies. Please go ahead.

[David Katz, Managing Director at Jefferies]

Morning, everyone. Thanks for taking my question. I appreciate all of the detail so far. I wanted to ask about the aspect of the fees, which is non-RevPAR driven, which are, you know, royalties and credit card fees, et cetera. Is there any sort of insights or help that you can offer us, you know, as we think about modeling out the next year or two as to what those might grow and any puts and takes? Thank you.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

Yeah. David, I think we've talked about this in the past. We get that it's a little bit hard to model sort of specifically what's going on. Our non-RevPAR driven fees cover a bunch of different things. Obviously, you know, our co-brand credit card and our license fees from HGV being the largest part of that. We have other things in there like residential development fees and the like. You know, we've said this before, that's been less volatile, right? It declined less than RevPAR declined, you know, during COVID. Now at this point, it's growing less than RevPAR. I think for 2021, it grew about 2/3 of the rate of RevPAR, and that's probably a decent way to think about it going forward. It's hard to say, right?

[Kevin Jacobs, CFO and President of Global Development at Hilton]

It depends on how those things perform and what goes on. I think it's gonna continue to be a decent growth rate and additive to our fees. For 2021, it was actually higher, you know, our non-RevPAR fees, or I think, Chris, you might have said this earlier, so sorry if I'm repeating it, but our non-RevPAR fees were higher than they were in 2019. You know, and our credit card program is performing quite nicely. I think just, you know, a few stats to give you some color. You know, our account acquisitions were up 45% last year. Our spend was up about a third year over year. Really strong performance, but again, at a lower rate than overall RevPAR because RevPAR is growing at a really high rate in recovery. Hopefully

[David Katz, Managing Director at Jefferies]

Growth, but at a lesser rate.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

At the moment.

[David Katz, Managing Director at Jefferies]

Perfect. Thank you.

[Operator]

The next question is from Robin Farley with UBS. Please go ahead.

[Robin Farley, Managing Director and Leisure Analyst at UBS]

Great. Thank you. Originally my question was gonna be to clarify the comments, the opening remarks about transient midweek nights, for all future periods down only 4%, 'cause that seemed like, that number was sort of too strong a recovery. I guess really based on you really already commented on the growth in the small and medium. I don't know if you have anything else to add on that, you know, only being down 4%. I would think just even the booking window being shorter would make that hard to be at that good of a number. So I'm thinking [crosstalk].

[Chris Nassetta, President and CEO at Hilton Worldwide]

No, I don't. Robin, I don't have anything to add other than, yeah, it's short. We, you know, the very nature of advanced bookings and transient only gives you a window so far out in time. It's a relatively short window. But those are the stats, and again, I gave them to you because I think it is indicative not only of the strength that's building in that environment, but the change from literally the beginning of the year when Omicron was, you know, a very big thing to a world where Omicron is becoming a lot less of a thing. We're getting to more endemic stages of COVID-19.

[Robin Farley, Managing Director and Leisure Analyst at UBS]

Just for a follow-up, if you could put a little more color around, you mentioned reinstating the dividend in Q2 and returning to share repurchase in Q2. Can you talk about where will you sort of start at a dividend payout or dividend level, probably lower than pre-pandemic initially? Or just sort of give us some thoughts around how you're thinking about that balance as you restart that return to shareholders [crosstalk].

[Chris Nassetta, President and CEO at Hilton Worldwide]

Yeah.

[Robin Farley, Managing Director and Leisure Analyst at UBS]

Thanks.

[Chris Nassetta, President and CEO at Hilton Worldwide]

As I said a couple times, we're intending to do it in Q2. We have not, you know, formally declared a dividend, so we haven't made a final decision. I think the way to think about it and our intention at this point is to reinstate the dividend at the exact same level we had it before, same, you know, $0.15 a share, which is where we were before, to go back to where we were, and then use the bulk of our free cash flow and otherwise to re-implement our share repurchase program. I know there are different views in the world about this. Our view, my view, has always been that, you know, having some modest dividend is helpful.

[Chris Nassetta, President and CEO at Hilton Worldwide]

It does open the universe of investors up a bit to us, and we proved that pre-COVID, and we've talked to lots of shareholders, and I think still have that view. But the way to drive the best long-term returns for all of us that are shareholders is to have the bulk of our program be in the form of share buybacks. That's what we thought pre-COVID. We did a whole bunch of work to see is there anything going on? Jill's nodding her head 'cause she did a lot of it. Is there anything that's changed in the world or with our shareholder base currently that would lead us to a different conclusion? We have not, we do not believe there is. That's what we'll do. We'll get started.

[Chris Nassetta, President and CEO at Hilton Worldwide]

I think the way to think, you know, we're obviously I haven't given guidance generally, but I think the way to think about it is we'll start out at least thinking about it at a minimum being the free cash flow that we're gonna produce this year. The way to think about that, I think directionally is, you know, back to my margin point, while we're not back fully recovered, you know, by a pretty decent margin yet to 2019, certainly as you look at the full year 2022, because we have the business is performing better, we've done these structural things that I described to drive higher margins, our free cash flow is actually pretty much back this year, we think, to 2019 levels. We'll start at a minimum, you know, with that, and go from there.

[Robin Farley, Managing Director and Leisure Analyst at UBS]

Okay, great. Thanks very much.

[Operator]

The next question is from Chad Beynon with Macquarie. Please go ahead.

[Chad Beynon, US Director of Research and Head of Gaming and Leisure at Macquarie]

Hi, good morning. Thanks for taking my question. I believe your conversion NUG component of total growth has been in the 20% range. Can you help update us on this in terms of where it was for 2021? For 2022 against your NUG guide, how should we think about conversions and what that will be as a percentage, you know, being slightly offset by higher, I guess, ground up growth? Thanks.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

Yeah, thanks, Chad. Look, I think it'll be. I mean, the short answer, the crisp answer is I think it'll be consistent, right? It's been about 20%. We're actually doing more conversions. You know, we've given you some of the stats, but you know, our approvals, our openings for the full year were up 13% year-over-year. Actually, our approvals for full year last year were up 42% in conversions. We're having nice growth in conversions and we're doing more, but we're also doing more ground up development, right? You know, will it be you know, slightly higher going forward you know, for the next couple of years? It could be.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

Depends a little bit on, you know, how a couple of big deals break that can move that percentage a little bit here or there. I would think about it sort of as being pretty consistent around, you know, 20% or the low-20s of deliveries. I think it's actually a good news story across the board. I mean, we in the Americas, for 2021, we signed almost half of the conversion deals that were done in the Americas. We're doing a lot of conversions, but the reason it's not sort of spiking from 20%-30% is we're delivering a lot of new development as well.

[Chad Beynon, US Director of Research and Head of Gaming and Leisure at Macquarie]

Thank you very much.

[Kevin Jacobs, CFO and President of Global Development at Hilton]

Sure.

[Operator]

Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back to Chris Nassetta for any additional or closing remarks.

[Chris Nassetta, President and CEO at Hilton Worldwide]

Thanks very much, everybody, for joining today. Obviously, continuing on with recovery. I think we are, as I've said a couple times, hopefully getting through the Omicron variant and very rapidly to an endemic stage of this. We're obviously optimistic as we look to the second quarter and the second half of the year and overall beyond that. Thanks for the time. We'll look forward to updating you on trends that I think will be a lot better the next time we talk. Thanks and have a great day.

[Operator]

Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Participants

Executives

• Chris Nassetta, President and CEO
• Jill Slattery, SVP of Investor Relations and Corporate Development
• Kevin Jacobs, CFO and President of Global Development

Analysts

• Chad Beynon, US Director of Research and Head of Gaming and Leisure at Macquarie
• David Katz, Managing Director at Jefferies
• Joe Greff, Managing Director at JPMorgan
• Patrick Scholes, Managing Director of Lodging and Leisure Equity Research at Truist Securities
• Rich Hightower, Managing Director of US REIT Research at Evercore
• Richard Clarke, Senior Analyst at Bernstein
• Robin Farley, Managing Director and Leisure Analyst at UBS
• Shaun Kelley, Senior Research Analyst and Managing Director at Bank of America
• Smedes Rose, Director at Citigroup
• Stephen Grambling, VP at Goldman Sachs
• Thomas Allen, Managing Director at Morgan Stanley