Hilton Worldwide Q3 2021 Earnings Call Transcript

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Provided by Quartr
October 26, 2021

Key Takeaways

  • System-wide RevPAR grew 99% year-over-year in Q3 and was only down ~19% versus 2019, driving adjusted EBITDA of $519 million (up 132% versus last year).
  • Leisure travel rebounded strongly with room nights roughly in line with 2019 and leisure rates exceeding prior-peak levels, resulting in U.S. weekend occupancies near 85–90%.
  • Business transient travel reached about 75% of 2019 room nights and group RevPAR hit ~60% of 2019 levels—up 21 percentage points sequentially—showing improving mid-week and social event trends.
  • Development continued robustly with 6.6% net unit growth in Q3, over 42 000 net rooms added year-to-date and a 404 000-room pipeline (62% outside the U.S.), supporting a full-year net unit growth forecast of 5–5.5%.
  • Hilton Honors membership rose 11% year-over-year to 123 million, accounting for 59% of occupancy, and saw new digital innovations like Digital Key Share and automatic room upgrades for elite members.
AI Generated. May Contain Errors.
Earnings Conference Call
Hilton Worldwide Q3 2021
00:00 / 00:00

There are 13 speakers on the call.

Operator

Good morning, and welcome to the Hilton Third Quarter 2021 Earnings Conference Call. All participants will be in a listen only mode. After today's prepared remarks, there will be a question and answer session. 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.

Operator

You may begin.

Speaker 1

Thank you, Chad. Welcome to Hilton's Q3 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 the forward statements and forward looking statements made today speak only to our expectations as of today. We undertake no obligation to publicly update or revise these statements.

Speaker 1

For a discussion of some of the factors that could cause actual results to differ, Please see the Risk Factors section of our most recently filed Form 10 ks. 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 on today's call in our earnings press release and on our website at ir.hilton.com. This morning, Chris Nassetta, our President and Chief Executive Officer, We'll provide an overview of the current operating environment. Kevin Jacobs, our Chief Financial Officer and President, Global Development, We'll then review our Q3 results.

Speaker 1

Following their remarks, we'll be happy to take your questions. With that, I'm pleased to turn the call over to Chris.

Speaker 2

Thank you, Jill. Good morning, everyone, and thanks for joining us today. We are pleased to report another quarter of very solid results That demonstrates continued recovery and the resiliency of our business model. Increases in vaccination rates And consumer spending coupled with improving business activity continue to drive solid travel demand throughout the summer and into the fall. As global borders reopen and the travel environment recovers, we remain extremely encouraged by people's desire to travel and connect more than ever before.

Speaker 2

In the Q3, system wide RevPAR grew 99% year over year. Compared to 2019, RevPAR was down roughly 19%, improving 17 percentage points versus the 2nd quarter With system wide rates down just 2.5% versus 2019. Adjusted EBITDA totaled approximately 519,000,000 Up 132% year over year and down 14% versus 2019. Performance was primarily driven by Strong leisure trends with leisure room nights roughly in line with 2019 levels with leisure rates Exceeding 2019 levels, business travel continue to gain momentum with mid week occupancy and rates improving meaningfully versus The second quarter. In the quarter, business transient room nights were roughly 75% of prior peak levels.

Speaker 2

Group continued to lag, but showed significant sequential improvement versus the 2nd quarter boosted by strength in social events. For the quarter, group RevPAR was approximately 60% of 2019 levels, improving 21 percentage points from the Q2. Overall system wide RevPAR versus 2019 peaked in July at 85% with rates just shy of prior peaks. As expected, recovery slowed modestly later in the quarter due to typical seasonality and customer mix shift, But overall trends remain solid. Both August September RevPAR achieved roughly 80% of 2019 levels driven by continued strength in leisure and upticks in business travel post Labor Day as offices and schools reopen.

Speaker 2

These trends improved modestly in October with month to date RevPAR at approximately 84% of 2019 levels And rates in the U. S. Nearly back to prior peaks. Roughly 40% of system wide hotels have Exceeded 2019 RevPAR levels in October month to date. Additionally, bookings for all future periods are just 8% below 2019.

Speaker 2

With loosening travel restrictions and strong non residential fixed investment forecast, we remain optimistic for future travel demand. TSA reported 3rd quarter travel numbers were nearly 80% of 2019, With demand picking up further following the announcements of the U. S. Border reopening and the lift of the international travel ban for vaccinated travelers. Additionally, studies show that nearly 70% of U.

Speaker 2

S. Businesses are back on the road, up 28 points from the end of the second quarter, With roughly 80% of our typical corporate mix coming from small and medium sized businesses And with the lagging recovery of larger corporate travel, we have taken the opportunity to continue our work from before COVID to Further increase our focus on this segment of demand. This demand is higher rated and more resilient, which has helped us recover more quickly In business transient and should drive rate compression in the future as larger corporate travel picks up. On the group side, Our position for the rest of the year remains fairly steady with forward booking sentiment improving as variant concerns Additionally, the recent re openings of some of our large urban properties like the New York Hilton Midtown increase our confidence in our positioning as group recovers. Turning to development, we added nearly 100 hotels and 15,000 rooms across all major regions And delivered strong net unit growth of 6.6 percent in the 3rd quarter.

Speaker 2

Conversions represented roughly 3rd of openings. Year to date, we've added more than 42,000 net rooms globally, higher than all our major branded competitors. Our performance reflects the success of our disciplined growth strategy, the strength of our brands, network effect And commercial engines across the world. It also illustrates our increasing confidence in a strong recovery in global tourism in the months years During the quarter, we launched our large scale franchise model in China, enabling independent owners to For franchising opportunities with our Hilton Garden Inn brand with a prototype developed specifically for the Chinese market, to date we have signed more than 100 deals To develop Hilton Garden properties in China, strengthening our confidence in the long term growth of our focused service brands and our ability to cater to a growing middle class. Following our recently announced exclusive license agreement with Country Garden, We were thrilled to open our 1st Home2 Suites in China.

Speaker 2

With plans to grow to more than 1,000 Properties, we look forward to leveraging our partnership to capture the rapidly growing demand for mid scale hotels in China. We also celebrated the opening of our 500th Home2 Suites following the brand's launch just 10 years ago, making it one of the fastest growing Brands in industry history and boasting the industry's largest pipeline in North America with more than 400 hotels in development. Our luxury and lifestyle footprints also continue to expand globally with the debut of the Canopy by Hilton in Spain And the highly anticipated opening of the Mango House LXR in the Seychelles. Marking another important milestone in its global LXR celebrated its debut in Asia Pacific with the opening of the Roku Kyoto. In the quarter, we signed nearly 24,000 rooms, up approximately 40% year over year driven by Strength in the Americas and Asia Pacific regions.

Speaker 2

Driving our positive momentum in luxury, we announced the signing of the Conrad Los Angeles, the brand's First property in California, the 300 room hotel is expected to open in 2022 as part of the Grand LA Mixed Use Development. With approximately 404,000 rooms in development, more than half of which are under construction, we expect positive development trends To continue, driven by both new development and conversion opportunities. For the full year, we expect net unit growth in the 5% to 5.5% range and we continue to expect mid single digit growth for the next several years. For our guests, flexibility has always been important, but the pandemic has made choice and control even more critical. We were excited to launch several new commercial programs and loyalty extensions, including the launch of Digital Key Share, a First, for a major hospitality company.

Speaker 2

This feature allows more than one guest to have access to their room's digital key. Additional technology enhancements have enabled our elite Honors members to begin enjoying automatic room upgrades. Gold and Diamond members may be notified of a complementary upgrade prior to arrival, enabling guests to choose their We continue to focus on new opportunities To further engage our 123,000,000 Honors members and are thrilled to see engagement is nearly back to 2019 levels. In the quarter, membership grew 11% year over year. Honors members accounted for 59% of occupancy With the U.

Speaker 2

S. At 66%, just 2 points below 2019 levels. During the pandemic, approximately 23,000,000 U. S. Households brought home a new pet, including my own.

Speaker 2

And like so many others, my family loves traveling with our new dog, Miller. In the coming months, Homewood Suites will join Home2 In becoming 100 percent pet friendly in the U. S. With plans for all limited service brands to be pet friendly by the Q1 of next year. And thanks to our exciting partnership with Mars Pet Care, we're offering new pet focused programming and benefits.

Speaker 2

Our guests are eager to travel with their furry little friends and by making that simpler, we are able to capture demand and bring new business into the system. As the global travel environment improves, I continue to be impressed by our team members' dedication to providing Exceptional experiences to our guests. That's why I am particularly proud that last week we were named the number 3 World's Best Workplace by Fortune and Great Place After 6 consecutive years of being ranked, Hilton was the only hospitality company on the list. We truly believe that Hilton continues to be an engine of opportunity for all of our stakeholders around the world and are very optimistic for the With that, I will turn the call over to Kevin for a few more details on our results in the quarter.

Speaker 3

Thanks, Chris, and good morning, everyone. During the quarter, system wide RevPAR grew 98.7% versus the prior year on a comparable and currency neutral basis As the recovery continued to accelerate, driven by strong leisure demand, particularly in the U. S. And across Europe. Performance was driven by both occupancy and rate growth.

Speaker 3

As Chris mentioned, system wide RevPAR was down 18.8% compared to 2019. Adjusted EBITDA was $519,000,000 in 3rd quarter, up 132% year over year. Results reflect the broader recovery in travel demand. Management and franchise fees grew 93%, driven by strong RevPAR improvement and honors license fees. Additionally, results were helped by continued cost At both the corporate and property levels.

Speaker 3

Our ownership portfolio performed better than expected in the 3rd quarter, driven by the accelerating recovery in Europe, the Tokyo Olympics and ongoing cost controls. For the quarter, diluted earnings per share Adjusted for special items was $0.78 Turning to our regional performance, 3rd quarter comparable U. S. RevPAR grew 105% year over year and was down 14% versus 2019. Robust leisure demand and improving business transient trends drove strong performance in July.

Speaker 3

Trends modestly slowed later in the quarter due to seasonality. U. S. Occupancy averaged nearly 70% for the quarter with overall rate largely in line with 2019 In the Americas outside the U. S, 3rd quarter RevPAR increased 168% year over year and was down 30% versus 2019.

Speaker 3

The region benefited from easing travel restrictions and strong leisure demand over the summer period. Canada also saw a noticeable step up in demand in August after reopening their borders to vaccinated Americans. In Europe, RevPAR grew 142% year over year and was down 35% versus 2019. Travel demand accelerated across the region in the Q3 as vaccination rates increased and international travel restrictions loosened. In the Middle East and Africa region, RevPAR increased 110% year over year and was down 29% versus 2019.

Speaker 3

Performance benefited from strong domestic leisure demand and international In the Asia Pacific region, 3rd quarter RevPAR grew 5% year over year and was down 41% versus 2019. RevPAR in China was down 25% as compared to 2019 as a rise in COVID cases led to reimposed restrictions and lockdowns across the country. China has recovered steadily into October with occupancy nearing 60% for the month. In the rest of the Pacific region prolonged lockdowns in Australia and New Zealand offset upside from the Tokyo Olympics. Turning to development, as Chris mentioned, in the 3rd Quarter, we grew net units 6.6%.

Speaker 3

Our pipeline grew sequentially totaling 404,000 rooms at the end of the quarter with 62% of pipeline rooms located outside the U. S. Development activity continues to gain momentum across the globe As the recovery progresses, a testament to the confidence owners and developers have in our strong commercial engines and industry leading brands. For the full year, we now expect signings to increase in the mid to high teens range year over year and expect net unit growth of 5% to 5.5%. Turning to the balance sheet, we ended the quarter with $8,900,000,000 of long term debt and $1,400,000,000 in total cash and cash equivalents.

Speaker 3

We're proud of the financial flexibility we demonstrated over the past 18 months and looking ahead, we remain confident in our balance sheet management as we continue to progress through the recovery and move closer towards our target leverage. Further details on our Q3 can be found in the earnings release we issued Earlier this morning, this completes our prepared remarks. We would now like to open the line for any questions you may have. We would like Chad, can we have our first question please?

Operator

Thank you. And the first question will come from Carlo Santarelli with Deutsche Bank. Please go ahead.

Speaker 4

Hey, Chris, Kevin, everybody. Thanks for taking my questions. Good morning. Chris, you gave a lot of color as did you, Kevin, in your prepared remarks. But one thing I just wanted Kind of ask around was how you guys are seeing or believe the cadence of business transient travel will play out here In the Q4, how kind of or how you're thinking about the sequencing through 2022?

Speaker 2

Yes. I mean, great question, Carlo, and obviously one everybody is interested in. So maybe I'll talk about all the segments a little bit because it's hard to do One without the other. So to grossly oversimplify, which I like to do occasionally, The way I would see it is, as we have been seeing through the Q3 and what I think we'll see in the Q4 is a continued uptick In Business Transient Travel, I think that will come from all segments of Business Transient, but again, probably continue to be led This year in the Q4 by small and medium SMEs, small and medium enterprises. I don't I don't think you'll see a huge pickup, but I think you'll see a modest pickup.

Speaker 2

At the same time, just because people are increasingly back Now the weekends will continue to rage, I think. The weekends have been extraordinary, but the mid week leisure travel will continue to tick down. And I think Those 2 will largely offset each other in the Q4. I think group will remain pretty consistent. Obviously, we had a big uptick in the summer and then Delta variant sort of slid out The momentum a little bit on group.

Speaker 2

People think there's advanced planning, people have to spend money. And so while there's plenty of group occurring, it's But really largely sports and social. At this point, I think that continues about like what we've seen in the Q3 into the 4th, Because people are all the pent up demand is there, but people are sort of advanced planning more into next year just So sort of finally get through Delta and hopefully to the endemic stage of COVID, which sort of feels like We're in the process of doing as we speak. As we think about 2022 with all those segments, what I would say I think leisure will remain elevated relative to historical standards. Obviously, my belief is kids will still be back in school, more offices are going to open.

Speaker 2

So mid week, we will get back to more normalized levels. But I think the weekends, People want to be out. It turns out they didn't like being locked in their closets and basements and attics and so they are going to want to get out and we have seen this pattern of Very high demand on weekends. I think that will continue. And so I think on the margin, leisure will be continue to be stronger than we've historically seen I think business transient will continue to move up.

Speaker 2

You will continue to See great strength in small and medium enterprises which aren't fully back to pre COVID, but getting pretty close. And my own belief is you will start to see the large corporate step into the game. I mean they are already in the game, but they are still sort of like 40% off of 2019 levels. I think you will see a step change in the large corporates which will contribute along with SMEs To continue, upticks in business transient. And then I think group is clearly going to be better next year than this year.

Speaker 2

I think Reality is the Q1 probably is typically a slow group quarter. I don't think it will be different in that way. I think people are going to want to Clear the mechanism of getting past the winter just because concerns of flu seasons and all that given what we've all been through. I think as you get into Qs 2, 3 and 4, both booked business and realized business On the group side, it's going to be better. So, I think 2022 is sizing up to be I I think the Q4 is sizing up to be fairly similar to the Q3 and I think 2022 is sizing up to be another big step forward on recovery to more normalized times.

Speaker 4

Thank you, Chris. That's helpful. That's it for me.

Speaker 2

Thanks, Carla.

Operator

And the next question comes from Joe Greff from JPMorgan. Please go ahead.

Speaker 5

Good morning, Chris, Kevin and Jill, you guys were had some interesting comments on the development side and obviously positive there. Chris, when do you think hotel construction starts trough, when do you think new signings be or have they?

Speaker 2

Yes. Another we've spent a lot of time looking at that through the last couple of quarters and very recently. Here is what I'd say. I gave you a sense, so I won't repeat what both Kevin and I said about NUG. Kevin, we both talked about it this year.

Speaker 2

I give you a sense in our prepared comments that we think we'll be in the mid single digit for the next couple of years. Obviously, that requires a lot of work. It requires signing deals, starting construction that then ultimately lands in our NUG numbers. I think when you look back 2 years from now at this period of time, I am Of the mind and reasonably confident that what you will see is the trough in deal sightings with last year. As Kevin mentioned, we're going to be up in the mid to high single And signings this year we think.

Speaker 2

I mean we're not done with the year. We always have a good flurry of activity at the end, but we got a lot of it on the books. And so we're pretty damn confident we're going to be up nicely. And I don't see why next year given what's going on in the environment in Particularly operating recovery, pricing power, which I'm sure will come to, we'll do it maybe in another question, That we're going to see more deals signed next year. So I think last year was probably in my mind the trough for signings.

Speaker 2

I think this year For those same exact reasons, will be the trough in construction starts. Starts always will lag the signings a little bit. We are definitely going to be a little bit modestly down in signings this year after being down last year. Our expectation is that we'll turn around next year and that's why we think we'll be sort of in the mid single digits for a couple of years and then Back on track being in the 6% to 7% range just because starting this year we're signing more, starting next year we're starting more. We're obviously filling in a lot and you saw in the Q2 a third of our NUG was conversion.

Speaker 2

So we're filling in and So between all of those factors, we think ultimately when we get out past a couple of years, we are back. The goal is to be back in the 6 And I think given what I see in the environment, that we feel pretty good about that. I mean, and I'll probably stop there with the only comment being Things are going to come back faster than prior recoveries here and that's because, the thing that's Very different than every other cycle I've seen in my 40 years and I'll leave it at this and somebody will I'm sure have a question is just pricing power. I mean the reality is typically it's like a grind to build back occupancy and rate lagged significantly. Rate is leading the charge and that obviously flows really nicely.

Speaker 2

We've done a bunch of things as you know and we Talked about a lot to create higher margin businesses out of all of these brands and when you flush all that Even with labor cost up and all of those fun things, these are higher margin businesses. And part of this is just we're in an inflationary environment and Guess what, we can reprice our product every second of every day. We're a very good hedge in that way to inflation And we're being very thoughtful about how we're pricing our product. And so, I think when we all look back on it, this will be A faster recovery on the development side than we've seen in prior cycles. And So I think we're going to be back on a very nice trajectory next year.

Speaker 4

Thank you.

Operator

The next question will be from Shaun Kelley from Bank of America. Please go ahead.

Speaker 6

Hi, good morning everyone. Hey, Chris. I think there are a couple of fat pitches there on the pricing environment. So maybe I'll bite If you could, but I guess my twist would be, could you give us a little color specifically on the business pricing side? I think we all see that the leisure rates are exceptional.

Speaker 6

And so maybe your thoughts on how long leisure can continue pricing like it is, your thoughts on the recovery of business pricing and then any headwind From large corporates, you've done a great job of delineating small and large. So how much of a headwind is large corporate? Does that price any differently? Is that a factor at

Speaker 2

Yes, a great question. Yes, I did sort of serve that up. So I guess I shouldn't be surprised. Listen, you embedded in the question as part of the answer, but obviously we feel first of all, let me not be pedantic, but You know, say what I say a lot when I'm asked this question. The laws of economics are alive and well, right?

Speaker 2

And that's what's going Why is leisure so strong in rate? Why are we able to price above historically high levels? Because there are Crazy amounts of demand like our weekend demand is off the charts. We're running 85% to 90% system wide in the U. S.

Speaker 2

On the weekends and we're pricing over Obviously, because we have a lot of demand. I do think that leisure Pricing power will continue because what I said before, I believe that leisure demand is going to remain at elevated levels, Yes, particularly on the weekends and that's going to give us nice pricing power. Even though, obviously the recovery in business transient has lagged, As I said in the quarter, we were 75%, but it's sort of a tale of 2 cities, which is I implied it a little bit. You have The big corporates which are still 40% off, but then you have small and medium which are only maybe 10%. You could even argue maybe 5% or 10% off.

Speaker 2

And so we have a fair amount of pricing power in the biggest piece In the biggest segments and they are less price sensitive. So broadly your biggest It's not everybody. Your biggest corporate customers can end up with sort of off bar 10% or 20%, Small and medium might end up at 5% or 7%. So that's why we were working so hard on accessing more of that Demand based pre COVID and has helped us during COVID. And so when you put it all together And you look at like even in the quarter, we are at 90% of 2,000 in business transient combined, We are already at 90% of 2019 levels even though we still have a ways to go to build back demand.

Speaker 2

I feel it's a long way to say, I feel pretty good about where that's going, because we're going to keep pushing on small and medium that's almost back. My guess is that will exceed prior levels and then the corporates are going to come in and that's going to allow us to put more in the top of the funnel to Price, you have more demand allows us to price more aggressively. I think when it's all said and done, if we were Eightytwenty before and I don't know exactly where it will be, but I suspect we will probably never go back to Eightytwenty in reality because We have been successful at finding other segments that we think are going to be there. They are going to be more resilient and they are going to be higher priced. So my guess is we will be managing to probably a ninety-ten world or something like that.

Speaker 2

But we do think Pricing power is not in business transient what it is in leisure, but it's not far off. And then group, group is So in the year for the year, similar to business transient, but as you look forward, because there's so much pent up demand And as I've talked about at least on the last call, we are actually pricing already over 2019 levels. So there is pricing power and you'd say, well, wow, if group is Still way off from a consumer revenue point of view what's going on. What's going on is, group is very the one segment That books weigh in advance and there is a limited amount of meeting space in the world and in the United States. We happen to have a lot of it.

Speaker 2

I mean, there are a few of us that are very big players in that space. A lot of people want it. And so The reality is again laws of economics are alive and well. People want it. There's not enough of it.

Speaker 2

You have huge pent up demand that's sort of getting all Events that didn't happen that need to happen, new events and that's pushing into next year. And so, even though In the moment, group revenues aren't what they were. On a forward looking basis, there is A good amount of pricing power, which is why on all of our advanced bookings in the next year are pricing over 'nineteen levels at this point. So Again, back to the debate I put out there, I guess, it's unusual. Like I hate to admit, Heller, I've been doing this, but a long time.

Speaker 2

I guess I said it before, but it just hasn't really happened this way. Now there are a lot of reasons. We are better, right? We got much more sophisticated Revenue Management Systems, we're much more on top of it, I think, than we've ever been. Obviously, we're in a more Inflationary environment broadly, thank you, Federal Reserve and the U.

Speaker 2

S. Congress for fiscal and monetary stimulus. We could debate transitory or otherwise, but those things are translating into broadly A more highly inflationary environment and that applies to us too and that obviously It's helping from a pricing power point of view.

Speaker 6

Thank you very much.

Operator

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

Speaker 7

Thanks. Good morning. So a strategic question. You talked in your prepared remarks about starting open franchising for Hilton Garden Inn China, I thought that was an interesting change because with Hampton Inn, you did a master franchise agreement. Can you just talk about the rationale?

Speaker 7

Thank you.

Speaker 2

Yes. It's very straightforward. We've done 2. The one you mentioned, with Potato, with Hampton Inn and then more recently, I mentioned in my comments, we just actually opened our first Home2 Suites by Hilton in China on the road to doing a 1,000 of them with Country Garden, one of the largest players in China, which is another master license agreement. So we've done those 2.

Speaker 2

Never say never, I'm not saying, but the idea was to really help Get help from very large local players that knew how to garner scale very quickly to help build our network effect China and then ultimately come back in with our other brands and do it ourselves. And so that's exactly what we're doing with Hilton Garden Inn. We obviously have A massive franchise system here in the United States and frankly in Europe now where the bulk of the business here is franchise Increasingly, I think we're now the majority of the business in Europe is franchise. It's been a much smaller part of the business in China And in Asia Pacific, so we historically haven't had the same level of resources. And so what we've done During COVID, it has made some strategic investments to build out more infrastructure so that we can take other brands of our 18 Brand family of brands and do it ourselves.

Speaker 2

And We're trying to be very sort of balanced and balance all the risks associated with our expansion around the world. And we think It's great to work with 3rd parties. We love the Country Garden folks in Palatino. They've been incredibly important partners. We'll continue to be For a long, long time, but it's also important that we have that skill set ourselves in franchising.

Speaker 2

While it's Similar in China, it's not exactly the same. And so we've learned a lot and I think built a we're building A good infrastructure and a good muscle set to be able to take a bunch of other brands and do just what we've done here in the U. S, Europe and other places.

Speaker 7

I'm sorry, just a follow-up to this question. Any update taking on the potential TAM for these Flex Service brands in China?

Speaker 2

I I didn't hear the question.

Speaker 7

How many of these hotels do you think you can open in China? What's the addressable market?

Speaker 8

Oh, oh, oh,

Speaker 2

oh, oh, okay. You're going tech on me. I love that. I love that. We do look at I mean, I'm not going to give you that.

Speaker 2

It's 1,000, right? Think of it in the following way. We have limited service hotels in the U. S, probably 4,500. We have a population of 320,000,000 people, you have 1,300,000,000 people there.

Speaker 2

So there is no limit in my lifetime at least, Probably not, you're younger than me, but I'm not that old, so probably not in your lifetime either. 1,000 and 1,000. You could easily have 10,000 or 20000 or more. So I think there is growth opportunities in the mid market as far as the eye can see in China. So, while we have done some TAM work in China every time we come back and look at the numbers, they're off the charts.

Speaker 2

There are no rational limitations given what our footprint is, what the population is and the growth in their middle class.

Speaker 4

Helpful. Thank you.

Speaker 2

Yes.

Operator

The next question will be from Smedes Rose from Citi. Please go ahead.

Speaker 7

Hi, thanks. Chris, I was just wondering if you could talk a little bit about what your owners are Telling you about labor costs in the U. S. And kind of how they're handling the staffing and maybe just the sort of idea of slimmed down the operating models First is trying to get back to you. Yes.

Speaker 7

It's

Speaker 2

a hard time here Some of that, but I think I captured it, the labor costs and what owners are telling us. It's obviously been a big issue And one that we spent a lot of time on, a complex issue in terms of what sort of underneath the problem. What I would say is, obviously, there is no one owner group. The different owners in different parts of the country and the world for that matter Have different views, but if I sort of homogenize it all, which is hard to do, but if I do it in my head, I would say, While it's still a very difficult issue, we have started to see easing in terms of access to labor. I think we have ways to go.

Speaker 2

There are a bunch of things we are doing to help from a technology Point of view to access pools of labor that maybe we hadn't accessed historically, but broadly more labor is coming back in and Some of those pressures are easing. Obviously, labor is more expensive pretty much everywhere. I think that's a reality. Where it settles out, I think it's a little early to know, but I think it is sort of settling down as people are gradually coming back into the workforce. I think the end of the question, which is a really important one, which I sort of touched on earlier in one of my other filibusters How is it going to look for owners on the other side?

Speaker 2

And again, it's hard some owners, it depends on location, product, A thousand factors, but broadly and we're already seeing it, I think I said this. Broadly, I think when we get to the other side of this, across the system, margins are going to be higher. And you know why, with input costs going up, Labor costs going up and all of those fun things. They're going to be margins are going to be higher because rates are going to be a lot higher. Ultimately, when we get past this for all the reasons I talked about In terms of the pricing power that we have and the broader inflationary environment, that's very helpful to the business.

Speaker 2

At the same time, Particularly in the mega categories, which is where the bulk of the hotels are with our ownership community, we did a bunch of really important work And did a lot of testing and learning and made a bunch of changes in the hotels. In the end, we think to create a better experience for our Customers, but to do it in a more efficient way to drive higher margins. So we are pretty confident and we have pretty good evidence, which I will talk about that Even with the when labor comes back and you have to pay labor more, given where rate structures are going to be in most places And given the efficiencies that we've been able to garner that these are our owners are going to end up with higher margin businesses. And by the way, many, many of them, not all of them, So for those that haven't gotten there that are listening, keep the faith, but many, many owners are already there. Some of it is unsustainable, meaning part of it is they can't get enough labor and so they don't have enough people, so their labor costs are unusually low.

Speaker 2

But Even in places where they are able to get the labor back for the reasons I described, meaning more efficiencies on our standards And pricing power on the top line, they are driving very good margins. And so, we've had Owners have been in pain. I don't want to minimize it. There's still many of them in a lot of pain, but We're doing our level best to get them to the other side and make sure their businesses are stronger, both because that's what we should do as a Fiduciary to them, but also ultimately if we want to continue to be able to grow, we have to give them an investment alternative that Continues to make sense from a return point of view. And so we are hyper focused on it and I would say I feel really good.

Speaker 2

As I said, I think the development Cycle will flip faster than we've seen in prior cycles for these reasons. I just think that the economics, the laws of economics are alive and well, said it now twice Or 3 times that if people can get great returns because of the conditions macro and micro, macro we're all going on micro the things we're doing, Then they are going to want to build us more hotels and obviously with the signings being up in the Mid teens to plus, we think that's pretty good prima facie evidence that that's what's going on.

Speaker 4

Great. Thank you. Appreciate it. Yes.

Operator

And the next question will be from Stephen Grambling with Goldman Sachs. Please go ahead.

Speaker 9

Thanks. This is a bit of

Speaker 10

a multi parter, but you mentioned that the majority of the pipeline is outside the U. S. Can you just remind us of what that split maybe looks like within some of the major markets? How the contribution from international room growth could compare or contrast to the U. S.

Speaker 10

As we translate NUG to fees? And then if you could Talk to any kind of incremental signing opportunities that you're seeing that surfaced in new markets as a result of the pandemic that could be longer lasting? Thanks.

Speaker 3

Yes, Stephen, it's Kevin. I'll sort of try to take those in order. I think that the mix of rooms under construction It's just over kind of between 60% 65% outside the U. S. Versus inside the U.

Speaker 3

S. I think in terms of Look, we're always trying to enter new markets. I think we have 20 something, 25 to 30 new countries embedded in the pipeline That we don't have today, right. So we're always trying to enter new markets. I'm not sure really anything of that any of that has been opened up By the pandemic, I think it's just sort of the course of the growth of our business over time.

Speaker 3

And then trajectory really has a lot to do with how Places are coming out of the pandemic, meaning we've been even though there's been spikes up and down in RevPAR in China, for instance, As they go into lockdowns, the development trajectory there has actually continued to be pretty solid and continued to improve. But in places like Europe where Traditionally, it's more of a face to face development environment. The less people have been able the less our teams and the owners have been able to get on planes and move around country to Those signings have lagged a little bit, so actually see that as a tailwind coming out of the pandemic whereas there's a lot of pent up demand for development in EMEA broadly And I think that it's just going to require a little bit more mobility to surface that. But the rest of it is, just over time as Chris has talked about this, As you have a rapidly developing middle class with more demand for mid market products, you're going See a little bit more of that demand over time. I mean the full service business is not dead by any means, but you are just going to see on the margin the capital flows more to the limited service hotels.

Speaker 3

So we're going to do more deals where the capital flows and then as we bring franchising which has been very successful for us, Chris went through it, so I won't go through it again. But as we bring franchising to different parts of the world, particularly Asia Pacific, We're just going to do more franchise deals over time. You're not going to see, I don't think big step changes. You're just going to see a gradual growth over time in more limited service mix and Does that cover all the parts?

Speaker 10

One very quick follow-up. So from a net unit growth standpoint then, I guess the fees that you're getting from the international market maybe ends up being a little bit lower because of the RevPAR. But on the flip side, it sounds like you're doing more direct. There's a potential for that to actually improve within that mix. Is that fair?

Speaker 3

Yes, mathematically, right, the lower price points, It will blend in over time. Again, it will not change dramatically. We've modeled it every which way and it's really hard to make that But mathematically, it has to move over time. And the reality is, look, it's very high margin. It's 100% margin.

Speaker 3

Once we have scale in these parts of the world, it's 100% margin and infinite yield. So we'll take it.

Speaker 10

Awesome. Thank you so much.

Speaker 3

Sure.

Operator

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

Speaker 11

Great. Thanks. A lot of my questions have been asked already. One just to circle back and I hope I didn't miss this in the opening comment. The operator pulled me out of the But when you talked about group and the expectation that there'll be a lot of pent up volume for 'twenty two, can you give us a sense of And I think that is a reasonable expectation, but kind of where group on the books for next year is versus 'nineteen?

Speaker 11

Like in other It's likely to be higher, or maybe not in Q1, but kind of how that's pacing with what you have on the books for group 22. And I don't know if it has by quarter or first half, second half.

Speaker 2

Yes. I mean it would be weighted to Qs 2 through 4, first of all, for the reasons I Covered in a prior answer just meaning people want to get through the winter, 1. 2, the Q1 is never a big group quarter. So you put those two things together and it trends heavily to Qs 2, 3 and 4. We're in the 75 Percent, 75%, 80% on the books, which is about consistent with where we were in the last quarter.

Speaker 2

And what happened is, I think if you hadn't had the Delta variant spike, we'd probably be somewhat further along, but You had the delta variant sort of slowed. They cooled off the advance bookings on the group side, Which have now picked back up. The other thing going on of course is, we want to we do believe there's going to be a lot of group potential particularly in Qs 2, 3 and 4 and we don't want to commit. There's a level of lack of desire on our part to commit Too much space when we know that there will be a lot of pricing power. So it's sort of a bit of a delicate balancing act.

Speaker 11

Okay, great. Thank you.

Operator

And the next question will be from Richard Clarke from Bernstein. Please go ahead.

Speaker 12

Thanks. Good morning. Thanks for taking my question. I'll just note just on your cost reimbursement revenue has exceeded your The cost reimbursement expense for the first time really since the pandemic began. And you've lost, obviously, non underlying, but you've lost about sort of 500,000,000 through that delta as the pandemic has gone on.

Speaker 12

Is this the beginning potentially of you being able to claw that back? And could this be a sort of boost to cash flow over the next few quarters?

Speaker 3

Yes, Richard. I wouldn't necessarily I think what happened early in the pandemic is you had sort of rough numbers, you had revenue go down kind of 85% to 90% overnight and we did a really good job of taking expenses down, but we can only take expenses down call it 60% or 65%. So we basically were funding From our balance sheet, all the commercial engines and the websites and all the funded part of the business. And so Those things really are giant co ops. They're going to break even over time.

Speaker 3

So now what you're seeing is revenues and by the way, all the fees, all the sources of funds We will ultimately bring those funds back to breakeven and we will recover those deficits and at the moment you're seeing it as surpluses. But I wouldn't necessarily think of As clawbacks those funds run surpluses and deficits from time to time. So I think you'll see it run a surplus for a little while. And yes, the cash is Comingled, but it's our owners' money at the end of the day and we spend it all on them.

Speaker 12

Okay. That makes sense. Thanks.

Operator

The next question will be from Bill Crow from Raymond James. Please go ahead.

Speaker 8

Hey, good morning. Chris, I hope you don't mind, I'm going to challenge you a little bit on the leisure outlook for 2022. And I'm just wondering how much risk there really is when we think about the combination of the return to office, the absence of government checks, Much higher costs from inflation for the consumer and probably pretty considerable pent up outbound international demand. So I'm thinking about your comments on rate and leisure and weekday leisure in particular. Are we at risk Kind of setting ourselves up for disappointment next year?

Speaker 2

I don't think so. You heard my view. So you can We can have a debate about it, but I don't think so. For the following reason, I think the mid week is already being bled out now. So I don't I think most people most kids are back in school which then truncates mobility even if people aren't in the office.

Speaker 2

So while more offices are going to open through the rest of this year and into next year, what we've seen in the pattern of leisure during the mid week, It's all right. We've sort of washed out a large part of that already. I may be wrong, but I I believe the weekends are going to remain strong simply because I still think if you look at the $3,000,000,000,000 There's a long way to go to spend it all and I think people still want to do, they want the experiences that they were starved And now it gets concentrated more on weekends, which is what we're seeing now. I believe that will continue. I don't so the net of it is, mind you just to be clear is that relative to a normalized like 'nineteen level of leisure demand.

Speaker 2

I think we're getting back more towards that with a little bit better because I think the weekends are going I am not I agree with you. I don't think that the mid week leisure is going to be raging and that's not Sort of built in to my expectations. In terms of outbound, the world is opening up, But then there's inbound too, particularly for the cities that the big cities top 25 markets that historically depend on 20% of their business from inbound international travel, they've had 0 and starting next week or week after, The floodgates are going to open on that. So yes, you are going to have some people going outbound, but you are going to have a lot of people that want to come see America that is going to offset that And particularly with the top 25 markets, broadly, but particularly in the top 25 markets that are going to come in. Again, We're still in the middle of budgets and we're still debating all of this and where it ends up.

Speaker 2

I've been giving you my opinion and my sense of it. I think leisure will remain. When we wake up Next year and the following year and you compare it to the amount of leisure business that we did, which was probably 25% or 30% of our overall segmentation pre COVID, I think it will be higher than that. I think it will be higher than that because people want to get out more. There's plenty of incremental savings in the world that has not gotten anywhere close to being spent And the weekend business, while we were doing better on weekends than we had historically, I think it will stay even more elevated than that.

Speaker 8

Great. And Chris, can I give you the opportunity to maybe update us on the timing for potential capital returns And buybacks?

Speaker 2

Yes. We don't have anything new, but to repeat what I said last time, we Allocation strategy pre COVID, which was we were producing a lot of free cash flow that we didn't we can continue to grow the business In an industry leading way without the use of much of it, and we wanted as a result to give it back to our Shareholders because there was no reason for us to hoard it or do dumb things with it. And disciplined capital allocation, we believe is a hallmark of Long term delivering great returns for shareholders. My belief hasn't been changed through COVID. The only thing that changes, we didn't have a lot of free cash flow during the heat of the crisis.

Speaker 2

We are obviously getting past that. We are cash flow positive. We want to just Give it a little bit more time as I said on the last call, sort of finish out the year and If things go as we expect and consistent with what we have been seeing, we are going to reinstate State return of capital program in the first half of next year. And my guess is it will look quite similar. I mean we're still having that With our Board who obviously has a say in it, but I think if I had to pick a line, I think it will look a lot like what we were doing pre COVID And we are very focused on it and very anxious to get back to it.

Speaker 2

And so I direct you, I would say first half of next year.

Speaker 8

Perfect. Thank you.

Speaker 7

Yes.

Operator

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

Speaker 4

Hi, good morning.

Speaker 2

Good morning.

Speaker 4

Question on labor costs and specifically Hilton Corporations labor costs, any change in your expectations for G and A and Trajectory of your G and A versus what you've said in the past. And correct me if I'm wrong, I have in my notes here, you've talked about sensitivity of EBITDA to RevPAR EBITDA growth about 1.3x RevPAR growth, is that still your thoughts on that trajectory?

Speaker 3

Yes. I think what we said, Patrick, is that in the context of when RevPAR levels are elevated, RevPAR It's elevated the way it is. It will be in that zone. I think it should be obviously 90% of the businesses from That should be about 1 to 1 as things normalize. We think we can do a little bit better with net unit growth cost discipline, License fees, things like that, maybe a little bit better than 1 to 1 over time, but I think the 1.3 is more of when RevPAR is elevated.

Speaker 3

And then no change, short answer is no change in our views on G and A, right. We've been very disciplined. I think what we've said to you guys Is that cash G and A ought to be down this year in the mid to high teens from 2019 levels. We actually might do a little bit better than that this year, That pretty good cost discipline. GAAP is different, but you got a lot of moving pieces, particularly in the Q3 of this year.

Speaker 3

We're lapping over Some of the write downs of stock comp from last year. And then going forward, again, no real change. I think we all understand that With more business activity is going to come a little bit more expense and just like we're in an inflationary environment that's going to help On the revenue side, we're going to be paying people a little bit more along the way, but we do think we're going to maintain discipline. The changes that we Made to our structure are going to hold going forward and we still feel the same way.

Speaker 4

Okay. Thank you, Kevin.

Speaker 3

Sure.

Operator

The next question will be from Vincent Seapoll with Cleveland Research Company. Please go ahead.

Speaker 9

Great, thanks. Question on distribution. You guys have done a nice job driving direct business with, I think, loyalty contribution around 60% Pre COVID, I know OTA contribution fell from high teens to about low doubles while reducing commissions along that path. So A lot of exciting things happening on the distribution front. I'm curious on the other side of this, how you're thinking about OTA contribution as well as how high that loyalty contribution can get?

Speaker 2

Yes, really good question. I don't feel Really a lot different than I did pre COVID. I mean, we believe there's an efficient frontier and we've calculated it as best we can By individual market property, what based on what they can deliver at that price Point versus what we can deliver, how do we deliver the highest index or the highest revenue for the lowest distribution cost. And we do believe and that's why we've had a good relationship with the OTAs that they play a part in that. It's traditionally been in the sort of 10% or 12% range, and that's historically where we've been during COVID, that went up, But we wanted it to go up.

Speaker 2

We partnered I think quite successfully with our OTA partners knowing that The biggest segment of demand that was out there for most of COVID was lower rated leisure, which is what they are particularly good at, Non loyalty type customer base and so it crept up a bit, but not Too terribly much and we've already seen that sort of peak and start to come down. And so while we'll look at the efficient frontier as we always do Periodically and maybe if you think leisure is going to be a little bit higher component overall, maybe it goes up a little bit not much and it didn't move that much. So The net of all that is, I think when we wake up in a couple of years, it will look an awful lot like it did before. And we obviously feel good about the contractual terms that we have with the OTAs Now and our ability to continue to have attractive terms going forward. As it relates to Honors, The My Honors team is probably listening and they may need a diaper for this.

Speaker 2

But We maxed out in the 63%, 64% system wide And we're already in the U. S. As I mentioned in my prepared comments, not that far off of that. Globally, we're coming back as our Number 1, we've accessed more travelers that weren't loyal. So some of these leisure travelers that we didn't have access to, we've now accessed And more of our core customer is getting back on the road.

Speaker 2

We're getting back to normal. But I'm not going to put a number out there I'll give a heart my team will have a heart attack, but I believe that there is a lot of room to grow. I think the Super majority, if we're doing our job, the super majority of our customers want to be Honors members. It's a Proposition that they get benefits that you just don't get and they're meaningful. You can go through them, they get discounts, they get technology, they get experiences, Money can't buy.

Speaker 2

They get points that are a currency. They can shop on Amazon and Lyft and buy tickets at Live Nation. And there is No reason as we continue coming out of this to actively engage with our customer base where it shouldn't be we shouldn't be able to push it meaningfully higher Then where we maxed out before, now that will take time. And so to my Honors team, don't freak out. We're going to give you the time.

Speaker 2

But Our goals there, which I'm not going to state publicly, are meaningfully higher than where we were, which by the way is meaningfully higher than any of our competitors already.

Speaker 4

Thanks.

Operator

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

Speaker 2

Thanks everybody for the time today. I know it's a busy earnings season. We're obviously quite pleased Given what we've all lived through over the last 20 months to be able to report, the progress that we were able to report for the Q3, as you could tell from the call, I remain quite optimistic about where this recovery is going and what the opportunities are in the industry, but particularly For our business and the growth of our business and we'll look forward to reporting Q4 and full year After the New Year, look forward to seeing many of you while we're out on the road and have a terrific day and holiday if I don't see you.

Operator

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

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