Hilton Worldwide Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
May 3, 2022

There are 9 speakers on the call.

Operator

Good morning, and welcome to the Hilton First Quarter 2022 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, you may begin.

Speaker 1

Thank you, Chad. Welcome to Hilton's Q1 2022 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 looking statements, and forward looking statements made today Speak only to our expectations as of today. We undertake no obligation to update or revise these statements.

Speaker 1

For a discussion of some of the risk 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, will provide an overview of the current operating environment and the company's outlook. Kevin Jacobs, our Chief Financial Officer and President, Global Development, will then review our Q1 results and discuss our expectations for the year.

Speaker 1

Following their remarks, we'll be happy to take your questions. And 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, before we begin, I'd like to take a minute to express our sadness at the tragic events continuing to unfold in Ukraine. Our hotels have always been a part of the fabric of the communities we serve and we take our promise to make those communities better places to live and work very seriously. Along with the steps we've taken to protect our team members and guests, we've also partnered with American Express and our ownership community to donate up to 1,000,000 room nights across Europe to support Ukrainian refugees and humanitarian relief efforts. Additionally, the Hilton Global Foundation has contributed to World Central Kitchen and Project Hope to further assist with the humanitarian aid.

Speaker 2

We are keeping our Hilton family and everyone impacted by these horrific events in our thoughts and hope for a peaceful resolution to this crisis. Our Hilton values and purpose led culture have led us through uncertainty as well as recovery. Our team members around the world have worked hard to and as a result have positioned Hilton even stronger for the future. As we look to the year ahead, we are optimistic that our industry leading RevPAR premiums and fee based capital light business model, coupled with further demand recovery, We'll continue to drive strong performance and meaningful free cash flow, which will enable us to return Significant capital to shareholders in a disciplined way. With recent performance exceeding our expectation, we were pleased To have resumed our capital return program earlier than anticipated, beginning share repurchases in March.

Speaker 2

Through April, we Approximately $265,000,000 of buybacks. Additionally, we have declared a $0.15 per share quarterly dividend further Highlighting the confidence in continued recovery and the strength of our model, for the year, we expect to return $1,400,000,000 to $800,000,000 to shareholders in the form of buybacks and dividends. Turning to results in the quarter, system wide RevPAR increased More than 80% year over year, driving adjusted EBITDA up 126%. RevPAR was approximately 83% 2019 levels with adjusted EBITDA at 90%. Despite a choppy start to the year given omicron related demand pressures, 17 percentage points from January to March, down only 9% to 2019, driven by acceleration across All segments.

Speaker 2

In March, system wide rates were up 3% compared to 2019. Strong leisure transient trends continued to boost weekend performance with RevPAR in the quarter exceeding 2019 levels and rates up approximately 9% versus prior peaks. Acceleration in business transient and group Trends drove meaningful improvement midweek. U. S.

Speaker 2

Business transient RevPAR increased sequentially versus the Q4 with March down only 9% compared to 2019 levels. Improving trends from large accounts along with continued strength from SMEs boosted results. In March, revenue from large accounts was just 12% below 2019. Overall business transient now comprises 45% of total segment mix, just 10 points shy of pre pandemic levels. For April, overall U.

Speaker 2

S. Transient booked revenue for All future periods was up 17% versus 2019 levels with rates up 10% and room nights up 7%. Weekday booked revenue was up 9% compared to 2019 and weekend booked revenue Was up 38%, driven largely by strong rate gains. On the group side, Social and smaller events continue to leave recovery, while demand for company meetings and conventions improved meaningfully throughout the quarter. In March, total group RevPAR was more than 75% of 2019 levels, improving approximately 25 Points versus January.

Speaker 2

Additionally, group revenue booked in the Q1 for all future periods was down just 4% relative to 2019 levels and total lead volume for all future periods was up 3.5%. Compared to 2019, our tentative booking revenue is up significantly with rate gains for company meetings up more than 13%. Additionally, rates on new group bookings for in year arrivals are strong, up in the high single digits versus 2019. As we look to the balance of the year, we remain optimistic. Positive momentum has continued into the 2nd quarter with April RevPAR tracking at roughly 95% of 2019 levels.

Speaker 2

While macro risks and uncertainty exist, forecast for economic growth remain healthy. Additionally, our ability to reprice rooms in real time We think there is a good likelihood that we'll reach 2019 system wide RevPAR levels during the Q3. For the full year, we expect leisure RevPAR to exceed 2019 peak levels given excess consumer savings, A strong job market and pent up demand. We expect business transient to be roughly back to 2019 levels by year end, with expectations supported by rising corporate profits, rebounding demand from big businesses and loosening travel restrictions. On the group side, we expect RevPAR to be at approximately 90% of 2019 levels by year end as demand for Company meetings and convention business accelerates into the back half of the year.

Speaker 2

On the development front, our leading RevPAR index Premiums and powerful commercial engines continued to drive outperformance. In the quarter, we added more than 13,000 rooms and achieved 5 Net unit growth. We continue to deliver on our commitment to discipline and strategic growth, celebrating important milestones across segments and geographies. We opened our 500th Homewood in the U. S, our 50th Hilton Garden Inn in Asia Pacific And debut our largest hotel in the Asia Pacific region with the opening of the 10 80 Room Hilton Singapore Orchard.

Speaker 2

With a contemporary design, innovative dining experiences and extensive meeting space, the property is a Tastic representation of our flagship brand and puts us in an even stronger position in Asia to usher in a new era of travel. Building on last quarter's momentum, we also continued expanding our lifestyle portfolio with the openings of the Canopy in the Canopy New Orleans. Even with strong openings, we grew our pipeline to more than 410,000 rooms up year over year and versus the Q4. We continue to lead the industry in new development signings with Home2 Suites surpassing all other competitor brands globally. We demonstrated our commitment to further expand our luxury Lifestyle Portfolios in the world's most sought after destinations with the signing of the Waldorf Astoria Sydney, the Conrad Austin Hotel and Residences and Canopy Properties in Cannes and Downtown Nashville.

Speaker 2

We look forward to delivering World class service and unforgettable experiences in these exciting destinations. Conversion signings in the quarter were up 15% year over year and represented nearly 20% of overall signings. In recent months, we signed agreements to bring our conversion friendly brands Curio and Tapestry to exciting destinations like the Galapagos Islands, San Sebastian, Spain, Maui and Sonoma County, DoubleTree has continued to lead the way for European upscale growth with new conversion properties across France, Germany and the Netherlands. While rising costs are pressuring construction starts, we are on track to deliver 5% net unit growth for the year and remain confident in our ability to return to a 6% to 7% growth rate over the next few years. Reliable and friendly service are at the heart of our promise to our guests and we continue to leverage our direct channels to offer them even more Direct bookings continued to grow in the quarter and represent roughly 75% of our total bookings led by growth in Digital Direct.

Speaker 2

OTA mix continued to decline and is approaching pre pandemic levels as Increases in business transient and group demand shifted customer mix. In the quarter, Hilton Honors membership grew 15 to more than 133,000,000 members. Honors members accounted for 60% of occupancy, flat versus the Q1 of 2019 and average nights per member were up 11% year over year as engagement continued to grow. As we continue recovering from the impacts of the pandemic, I am inspired every day by the dedication of our team members as we welcome more guests back to our hotels. It's because of them and our culture of hospitality that we continue to be recognized as a great place to work.

Speaker 2

In fact, Hilton was recently named the number 2 best company to work for in the United States by Fortune and Great Place to Work, something I'm truly proud of. And now I'll turn the call over to Kevin for more details on our results in the quarter and our expectations for the year ahead. Kevin?

Speaker 3

Thanks, Chris, and good morning, everyone. During the quarter, system wide RevPAR grew 80.5% versus the prior year on a comparable and currency neutral basis. System wide RevPAR was down 17% compared to 2019 impacted by the omicron variant. Following slow start to the year. Demand picked up across all segments and regions in March, driven by continued strength in leisure demand and loosening corporate travel restrictions.

Speaker 3

Performance was driven by both occupancy and rate growth. Adjusted EBITDA was $448,000,000 in the 1st quarter. Results reflect the continued recovery in travel demand. Management and franchise fees grew 79%, driven by meaningful RevPAR improvement and strong honors license fees. Continued cost control further benefited results.

Speaker 3

Our ownership portfolio posted a loss for the quarter due to the more challenging operating environment, particularly at the start of the year in Europe and Japan where the portfolio is concentrated. Fixed rent payments at some of our leased properties also pressured results. However, performance improved throughout the quarter driven by strengthening demand across Europe in March. Rebining fundamentals coupled with cost And should continue to drive significant growth in operating performance going forward. For the quarter, diluted earnings per share adjusted for special items was $0.71 Turning to our regional performance, 1st quarter comparable U.

Speaker 3

S. RevPAR grew 77% year over year and was down 13% versus 2019. While the omicron variant weighed on demand at the beginning of the year, RevPAR improved 17 percentage points over the course of the quarter, with March down less than 6% versus 2019. Leisure Travel continued to lead the recovery with segment RevPAR exceeding 2019 levels for the quarter. Uptics in business transient and group travel, particularly in March, also contributed to solid performance in the quarter.

Speaker 3

In In the Americas outside of the U. S, 1st quarter RevPAR increased 137% year over year and was down 17% versus 2019. The Omicron variant suppressed demand in January February, but rebounded in March led by strong leisure demand, particularly at resort properties during the spring break In Europe RevPAR grew 3 49% year over year and was down 30% to 2019. Travel demand accelerated following the omicron outbreak with March RevPAR down 13% compared to 2019. The region benefited from easing travel restrictions an increase in cross border travel.

Speaker 3

In the Middle East and Africa region, RevPAR increased 121% year over year and was up 8% versus 2019. Performance continued to benefit from strong domestic leisure demand and greater international inbound travel as travel restrictions across Europe loosened. In the Asia Pacific region, 1st quarter RevPAR grew 11% year over year and was down 47% versus 2019. RevPAR in China was down 45% compared to 2019 as travel restrictions and reimposed lockdown suppressed demand. The rest of the Asia Pacific region saw modest improvement in demand recovery as more countries loosened border and arrival controls in March.

Speaker 3

Turning to development. As Chris mentioned, in the Q1, we grew net units 5%. Our pipeline grew sequentially totaling over 410,000 rooms at the end of the quarter robust demand for Hilton branded properties, demonstrating owner and developer confidence in our strong commercial engines and industry leading brands. Moving to guidance for the Q2, we expect system wide RevPAR growth to be between 45% 50% year over year or down 5% to 10% compared to Q2 2019. We expect adjusted EBITDA of between $590,000,000 $610,000,000 and diluted EPS adjusted for special items to be between $0.98 1 $0.03 For the full year 2022, we expect RevPAR growth between 32% 38%.

Speaker 3

Relative to 2019, we expect RevPAR growth to be down 5% to 9%. We forecast adjusted EBITDA of between $2,250,000,000 $2,350,000,000 representing a year over year increase of more than 40% at the midpoint and essentially recovered to peak 2019 We forecast diluted EPS adjusted for special items of between $3.77 $4.02 Please note that our guidance ranges do not incorporate future share repurchases. As Chris mentioned, we reinstated our share repurchase program in March, which had been suspended during the pandemic. Year to date through April, we completed approximately $265,000,000 in buybacks And our Board also authorized a quarterly cash dividend of $0.15 per share in the Q2. For the full year, we expect to return between $1,400,000,000 $1,800,000,000 to shareholders in the form of buybacks and dividends based on our adjusted EBITDA forecasts and assuming the high end of our target leverage range of 3 to modestly higher target leverage range in the future.

Speaker 3

Overall, we are proud of how we navigated the pandemic and remain confident in our Continue generating substantial free cash flow and delivering meaningful shareholder returns through buybacks and dividends. Further details on our Q1 results 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 to speak with all of you this morning, so we ask that you limit yourself to one question.

Speaker 3

Chad, can we have our first question, please?

Operator

Certainly, we will begin the question and answer session. And the first question will be from Joe Greff from JPMorgan. Please go ahead.

Speaker 4

Good morning, everyone.

Speaker 2

Good morning, Joe.

Speaker 4

Chris, how much of your 2nd quarter and full year RevPAR guidance is occupancy driven versus rate driven? How does moderating growth in leisure volumes, just given the tough comparison and relatively higher growth in business transient group volumes impact the blend Of ADR and ADR growth in the second half?

Speaker 2

Yes. I mean, we gave a lot of commentary on rate growth in the sense of Giving you as much visibility as we had to represent the strength that we're seeing. I mean, we're wonderful, as I said in my prepared comments, inflation hedge, we can reprice every minute of every day and as demand has picked up, we have certainly been able to do that and we expect that we will Continue to be able to do that. I think as the year goes on, we expect the largest part of RevPAR growth to come from rate growth. We obviously expect to see occupancy growth as well, but I think net net it will be majority driven by rate.

Speaker 2

In terms of the segments, leisure broadly Remains quite strong. I mean, right now, I think the number is consumers still have $2,500,000,000,000 of Savings that they accumulated during the pandemic in their pockets, while people have been out traveling a lot more than they had maybe a year ago. There's still a lot of people that haven't and a lot of people that really want to get out and have experiences. And so People that we have pretty full employment, people have a lot of money in their bank accounts and I think now feel quite safe Broadly, certainly here in the U. S, not everywhere in the world.

Speaker 2

Obviously, world's a big place, but in the Western world, feel safe going out. And so We expect to see very strong leisure continue. I mean, we think we'll probably have the biggest leisure summer we've ever had only to surpass last summer, This is the biggest leisure summer we had ever seen prior to what I think we'll see this summer. And then as we get into the fall and as People go are back more in the office, which we certainly are seeing now and expect to see more of. We're seeing as I articulated And Kevin did as well.

Speaker 2

We're seeing a very nice uptick in return to business transient and return on the group side. The group side lags a little bit we know, there's more planning involved in that, but we think the second half of the year is going to get stronger and stronger. And business transient, even over the last couple of months, We've seen pickup and notably and something I commented on in my prepared remarks, we've even seen the large corporates Start to come back where March was only 12% down and April You can assume was better. We don't have all the data on the breakdown in April, but certainly broadly business transient It was even better in April. So businesses have a lot of pent up demand, needs for Travel balance sheets are very, very strong.

Speaker 2

Profits are very strong. Liquidity is very, very strong. And so I think the combination That was what's going on with the consumer and then sort of the icing on the cake is the group side where there's just so much New demand, but then pent up demand, all of which I think will start to converge here in the second half of this year and into next I think puts us in a place where we feel really good about the short to intermediate term and both the demand side, But particularly the rate side. And again, the reason I gave the stats I did about forward looking booking trends on the transient Insight, which obviously only is so far out, but on the group side was that we really are seeing the ability To drive pricing power like a lot of industries are, but certainly makes us gives us the optimism That has led to our judgments on both giving guidance, but also on our return to capital program and the like.

Operator

Thank you. And the next question will be from Carlo Santarelli from Deutsche Bank. Please go ahead. Hey, everybody. Thank you.

Operator

Chris, you talked a little bit about kind of business transient back at 45 Percent versus I believe that was probably closer to 55 pre pandemic. And obviously, group is probably a couple of 100 basis points below its normal mix. As that stuff comes back and you think about maybe a full year 2023 and occupancy in general, What kind of pricing power do you think you have at occupancy levels that are kind of commensurate with 2019 levels, which I believe we're kind of 143, 144 ish.

Speaker 2

Yes. Well, let me first in terms of the mix, It's probably worth stating because I commented a teeny bit on my prepared comments. You're right, business transient, sort of the mix pre COVID Was plus or minus 55 business transient, 25 leisure transient and 20 20 group. If you look at sort of what I would sort of call The bottom of the recession driven by the pandemic, it went to 35 Business Transient, 55 Leisure and 10 group. Now it's 45 business transient, 39 leisure and 16 group.

Speaker 2

And I've been saying this so pretty much for 2 years. In the beginning, People maybe thought I was crazy, but that when we wake up and this sort of flushes through the system and we get fully on the other side of it, That business mix is going to look an awful lot like it did pre COVID, and I think we're on our way to that. And so I think when we look maybe not now, I think Leisure transient will probably remain elevated for a while, but I think it will it is regressing to the mean and it will look More like it did than like it has looked, in 2023 and certainly in 2024. In terms of broader pricing Pressure is all that comes back, not to be pedantic about it, but it's sort of the laws of supply and demand, the economics, Which is if we have a product that's in high demand and increasing demand and there's not a lot more, there's not enough supply and not a lot is being added, Which is sort of the case in terms of what's going on with all of our segments increasingly so in mid week and that's only going to increase and then you Compound that, with getting a decent group base starting in the second half of the year and the next year, I think we'll have meaningful pricing power next year just because the laws of supply and demand suggest we should and I think they're alive and well.

Operator

Fair enough. Thank you. The next question comes from Shaun Kelley from Bank of America.

Speaker 5

Hi, good morning everyone. Not to probably overly dig into this, but Chris, I think in the prepared comments you mentioned that April was running down Only about 5%. That's obviously already kind of at the top end of the guidance you provided for the Q2. I think we all get that the background sounds pretty optimistic. But could you just help us kind of reconcile That and maybe just some of the puts and takes around what it would take for things to be better than a little bit better than maybe what you've laid out in the guidance And or what factors might have led you to be a little bit more conservative?

Speaker 2

Yes. Well, I mean the guidance we gave is the guidance we gave, First of all, I mean, I think, Sean, there are it's a good question. I think there are some comp issues in certain months. But honestly, if you listen if you replay what I just said in response to Carlo's question, We believe that we're going to continue to see a very strong leisure demand base and an increasingly strong Leisure, business transient and group base as we march through the next few quarters of this year and in the next year. So We're not trying to signal in our guidance that we think there's something going on from a weakening point of view.

Speaker 2

We think things are strengthening.

Speaker 5

Thank you. Sorry to split hairs there. And maybe just as a quick follow-up, probably for Kevin. But could you a little bit about, obviously, the capital return guidance is super encouraging. Does that have you Holding a specific leverage target or you've mentioned a couple of times in the past about possibly revisiting what that target would be, but what sort of implied in the $1,400,000,000 to $1,800,000,000 that we're getting here.

Speaker 5

And does that leave you a little bit of room to go even higher still, should you reevaluate it?

Speaker 3

Yes, Sean. I mentioned this in my prepared remarks that they may have been a little garbled, but it implies at the high end of the range. It implies 3.5 times. So embedded in that, we've said and I said it in my prepared remarks that we continue to think about potentially Increasing leverage modestly over time, we think the balance sheet has shown that it can handle a higher level of leverage and the business can handle a higher level of leverage given what we just went through. And but there's still a lot of uncertainty in the world.

Speaker 3

And so we're starting with effectively a 25 a 0.25 times increase at the midpoint by saying we're the high end of the range and we'll take it from there.

Speaker 5

Thank you very much.

Operator

And the next question is from Thomas Allen from Morgan Stanley. Please go ahead. Thank you and good morning. Just a couple of follow-up questions on NUG growth. What's your level of confidence in the 5% guide this year?

Operator

Any updated thoughts on timing of getting back to 6% to 7%? And just how are development in China going? Thank you.

Speaker 3

Yes, sure. No problem. Look, we're giving you the guidance. So we're highly confident that we can Obviously, a lot of the stuff that's going on and that's going to deliver this year is construction in progress and we have a Good handle on that. I mean getting back to where we were before, I mean Chris said it in his prepared remarks over the next few years, getting back to 6% 7% is going to mean that starts need to start getting back to where they were.

Speaker 3

Now starts, this year we think will be about flat, Maybe slightly down. That will be down in the U. S, up in international, which is consistent with what we've been saying. We're still Start 66,000 rooms for construction this year, Which we think is still a pretty good rate of conversions. And then we think that on a run rate basis and some of that's going to be filled in by conversions.

Speaker 3

I mean, we mentioned Some of that in our prepared remarks conversions we think are going to be up. We're up 35% in the Q1. Year over year, we think they're going to be Around 25 percent or to about 25% or higher of our deliveries this year. So that will help fill in. And then we think we'll get back to that run rate on a run rate basis sometime in 2024, we think we'll be back to the 6% to 7%.

Operator

And I'm sorry, Kevin, just China?

Speaker 3

Yes, sorry, China. Sorry. Yes, look, China, what's going on now is that's very much in Part of the world of face to face culture, right? So the fact that they're locked down in Shanghai, a little bit in Beijing and other places is stopping Signings temporarily, but we still think we're going to be up slightly in terms of construction starts and we think we're going to open about 20% more rooms in China this year than we Last year, and so we think that once you get past kind of what's going on there on the ground that there's plenty of pent up demand for the product And once people can start moving around, we'll be back to sort of business as usual in China.

Operator

Perfect. Thank you very much. The next question is from Stephen Grambling from Goldman Sachs. Please go ahead. Hi, thank you.

Operator

On The contract acquisition cost side, it looks like in your guidance, it's maybe ticked up a bit versus pre pandemic levels. How should we think about this level There's a normalized run rate over the next few years. And is that investment coming in the form of loans, mezzanine equity or is it just straight investment into the deals without a future interest? Thanks.

Speaker 3

Yes, sure. I think look it is this year's guidance implies a little bit lower than last year. It is up over 2019. It's largely a good news story as we've talked about on prior calls, right? I mean And it's almost entirely key money.

Speaker 3

It's not to say that we never do a little bit of credit support or a little bit of a handful of mezz loans here and there, but it's almost entirely key money that has that elevated from pre pandemic levels. There's some great deals last year like Monarch Beach and Are all inclusive in Tulum and deals like that Las Vegas Resort's World Las Vegas was one of the big ones. And so those are great deals to win. Some of them are Sometimes they're conversions as in Monarch Beach and so they're in the year for the year deals and they get a little bit of expensive at the high end as we've This year's guidance implies a little bit lower, than last year, and we'd like to think it'll be around there for the next couple of years because we'd like We continue to win more than our fair share of these great deals. And I think what I'd say overall in closing is, I think It's still only 10% of our deals.

Speaker 3

90% of our deals require no capital support from us whatsoever. And I think that our contract acquisition cost Cost still holds up pretty well versus our competitors.

Operator

Great. Thanks. I'll jump back in the queue.

Speaker 3

Sure.

Operator

The next question is from David Katz from Jefferies. Please go ahead. Hi, good morning. I just wanted to go back To the notion of NUG and construction starts, etcetera, because we do continue to hear Bits and pieces around supply chain and availability and cost of materials. Can you just elaborate maybe a bit more on what you're baking into your guide and your thoughts From that perspective?

Speaker 3

Yes, happy to, David. I think that look, the Factors are well known, right? Input costs are up. You've got tightness in the labor markets. You've got input prices in terms of commodities.

Speaker 3

You've got financing, all of which It's been the case for a while and believe it or not despite what you read it's actually easing a little bit at the moment, but it's still elevated. And that's all baked into the guidance, right? That's why construction will be flat to slightly down this year. Otherwise, they would probably be up materially. They're down 25% roughly to where they were in 2019.

Speaker 3

Demand for the product based on the optimism and the outlook, demand for the product is actually up. I mean, we think our signings will be up in the mid High single digits this year. And there's that same level of optimism in terms of people wanting to get the project started. It's just being held back by the factors that you're talking So those factors are there. They'll probably be there for some period of time.

Speaker 3

And we think like all things that are cyclical, they will ease over And then the fact that our signings are up is what gives us the confidence to believe that our starts will go back to where they were roughly in And that our nug will go back to 6% to 7%.

Speaker 2

I think that's right. The only thing I'd sort of add to that and Kevin said it earlier in his And as inflation is our friend and it's our owners' friend. So if you look at what we've done In the system during COVID as a result of sort of going through every granular standard for every single brand, We've been able to drive a lot of efficiency at the hotel level. At the same time, So labor costs have been going up, but when you put all of it into the gunkulator, so to speak, with the savings we've created with the Inflationary pressures which are driving their rate up and obviously expenses aren't 100% of revenues. So they've got a Positive.

Speaker 2

They've got positive leverage there. Even in the face of increased labor costs, we are very confident that across all of our brands on a Sort of comparable basis margins are higher. So the enthusiasm in our owner community and why as Kevin rightly Pointed out, we think signings are going to be up is that our brands are doing great, they're driving great share and people are optimistic Recovery, but they're also looking at an equation where they're going to be able to drive higher margins on the other side. Now we have to have the financing market sort of Continue to ease input costs all that which will take a little bit of time. And in the meantime, we're having great success In the conversion world, we're going to probably, as Kevin said, increase conversions this year relative to last by 600 basis points of total So we feel pretty good about where we are.

Operator

Okay. If I may just follow-up quickly And use your gunkulator one more time. The owned and leased aspect of the model Looks like it really has two sides to it, one which is kind of a friend in this recovery and the other that Strikes me as a bit more challenging. Are there potential ways in the future that you can deal with the more Challenging aspects of it and turn them into a positive in some way?

Speaker 3

Well, sure. I mean, look, first of all, I'll start out with I implied this or I said this in my prepared remarks that portfolio the performance in that portfolio is improving. That is starting to turn around. It's been

Operator

concentrated in parts of

Speaker 6

the world that

Operator

have been

Speaker 3

a little bit in parts of the world that have been a little bit behind from a COVID recovery perspective, Central Europe and Japan in particular. As that portfolio recovers, it will contribute meaningfully to our growth rate, meaning the EBITDA in that portfolio is Grow at a much higher rate over the next couple of years than the overall fee businesses. And so it's going to contribute positively to our growth. So Finding a positive there to your question. And we think that from an EBITDA perspective over the course of This year, it's going to turn positive and then we actually think it will be positive slightly positive as an EBITDA contributor this year.

Speaker 3

And then I think what we can do is what we've been doing, right? I mean we have quite a large portfolio of leased assets when we inherited the company. We've chipped away at it such that it used to be 9% or 10% of the EBITDA of the business on a stabilized basis, it's going to be sub-five Even when it recovers over the next few years at a higher rate than the overall business, the fee business continues to grow. We shrink the lease portfolio over It's going to be less than 5% of the business over time. We got out of 7 leases last year.

Speaker 3

We allowed 4 of them to expire. And then because we couldn't come to terms with the landlord on renewing them or we didn't want to be there and we converted 3 of them to management or franchise agreements, so they stayed in the And they move from the capital heavy part of the business to the capital light part of the business. So we'll continue to take those opportunities over time, And that will end up being a positive as we shrink that business and grow the rest of the business over time.

Operator

Got it. Thank you very much. Appreciate it. The next question is from Smedes Rose from Citi. Please go ahead.

Operator

Hi, thanks. I wanted to just ask you, when you think about your guidance for the year, and it's great that you have visibility to provide that. How are you thinking specifically about which is actually in China and Europe over the balance of the year? You touched on that a little bit with Europe, I guess, Your ONL comments, but maybe just a little some more color on how you think that could shape up?

Speaker 2

Yes, I think at a high level, Smedes, The way I think about Europe is Europe's recovering quite nicely, not Eastern Europe, but the bulk of our business in Europe is driven by Western Europe and Europe is not quite as far along as the United States, but has been motoring along. Kevin gave you a few of the stats that I think support that. So We expect like the U. S, Europe, Western Europe to continue to recover. Our expectation is Eastern Europe for the Foreseeable future is going to be quite challenged, but again a very, very small, insignificant part of the Folio being impacted by that.

Speaker 2

In China, obviously, a more complex situation. We have a view. We have forecast, which is why we can build it in and give guidance. I think our expectation is in the second half of the year as China goes through a process of locking down some of the major cities and then reopening them That China is going to reopen for China at a minimum, not necessarily China For international arrivals, but as we saw in the early stages of the Pandemic when China got way ahead of the rest of the world, when China opens for China in China business, our business does Quite well and can recover very, very rapidly. So our expectation is second half of the year you will see China Start to reopen really with more benefit in the Q4 and into next year than in the Q3.

Operator

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

Speaker 7

Great. Yes, just some quick ones. One is, can you talk a little bit about the booking window? I feel like last fall, it was Sort of less than a week and maybe pre pandemic have been more like 30 days, just kind of where are we now with that visibility?

Speaker 2

Booking windows are extending as you might guess. I think within 7 days, it's now it had gotten to be A vast majority at the worst of COVID was booked within 7 days. I think we're approaching in April fifty-fifty Plus or minus like 50% of the business within 7 days, 50% longer. So huge, huge improvement from where we

Speaker 7

were. Great. And then on the OTA business, the distribution mix, you mentioned it was down, which makes sense as business transient comes back. Was that 15 percent you mentioned 85% direct, which I assume includes, I guess, GPDF?

Speaker 2

That's 70 5 percent direct. We didn't We typically wouldn't, but we're in sort of the pre pandemic, we were in the very low teens, Which is what we sort of believe the efficient frontier is for the business to be able to drive the best results for ownership community and I would say in the quarter we're basically there plus or minus.

Speaker 7

Okay, great. And then, I guess the last thing on group and you kind of you addressed a lot of it in your opening remarks. I think you said you expected that by the end of the year to be at 90% of 2019 levels. Is it fair to say that you expect 23% to be Kind of back at 2019 levels. And then also, I don't know if you gave a pacing for like what percent of 23 room nights are booked Paired to like what was booked at this time pre pandemic, just to think about it.

Operator

We

Speaker 2

didn't. I think the answer to the first question is yes. I do think 23 will be back at for group, we'll be back at 2019 levels. We did not give a stat. I think the stat from the best My memory is about 15% down versus 19% at the moment for 2023.

Speaker 2

But as I articulated in the Our sales folks can hardly keep up with all the leads that are coming in for the second half of this year and particularly into next year. And so I think just given the trajectory of how this recovery has occurred and what we've seen sort of in the year or for the year business, I wouldn't read a whole lot into being 15 down for next year. We have plenty of time to book that. And importantly, The rates are basically low double digits at the moment. The book business is low double digit Higher than 2019.

Speaker 2

And so part of what we're obviously trying to do is maximize the outcome. Rate Flows really nicely for our ownership community. So we're not we really don't want to rush too much in this Inflationary environment because we know the business is going to be there and we want to put it on the books at the highest rate possible. And so We're sort of taking our time and metering it out. I suspect, as I said, next year we will be at volumes similar 2019, when we're done with 2023 and at rates much higher than 20 19.

Speaker 7

Okay, great. That's it for me. Thanks.

Operator

The next question is from Patrick Scholes from Truist Securities. Please go ahead. Thank you. Good morning, everyone.

Speaker 2

Good morning.

Operator

For your net unit growth guidance of approximately 5 Percent. How does those percent how do those percentages break down by global region? Or basically, what are those percentages by growth rates by different regions. Thank you.

Speaker 3

Yes, it should be Patrick. It should be pretty similar to the rooms under construction are about 80% international. I don't have the sub breakdown in front of me right now for where it breaks out, but it ought to deliver about plus or minus what the rooms under construction 20% in the U. S, about 80% outside the U. S.

Operator

Okay. Do you happen to have, Andy, what The expectation is for the China growth rate?

Speaker 3

Yes. For openings, I think I said in one of my earlier answers, we think that Rooms opened in China this year are going to be 20% up year over year.

Operator

Okay. Okay. Thank you. Sure. And the next question is from Bill Crow from Raymond James.

Operator

Please go ahead. Good morning. Thanks. Chris, I continue to be really fascinated by this Interplay between the brands and the owners at a time when occupancy and rates are ramping up, but labor continues to be kind of short. I'm just wondering what you're seeing with guest satisfaction scores and if you have any concerns about that as we head into the busy summer months?

Speaker 2

We yes, I mean, I'd say first on the labor front, there are still significant issues that we're seeing both What we manage and as we talk to our franchise community what they're seeing. Over the last 6 months, we've seen a very Significant increase in labor coming back into the labor force and our ability to get folks in the hotels, which obviously Are needed given the demand profile and the increases in demand across all segments as I already described. So We're not all the way anywhere near where we want to be, but the issues are not they're not as extreme as they Faxion, I think listen, I think all service industries have suffered and we're right there along with the rest of them. We've been intensely monitoring and we have all sorts of ways to do that both through social, but our own tracking Systems that we call salt satisfaction and loyalty tracking. And what I've seen is those numbers that had Bottomed out in the middle of the pandemic have started to come back and go the other way as we've been able to 3 have been moving up in a positive way.

Speaker 2

So we have we're not satisfied with what we're doing right now. I think the team sitting at this table would say, I've been pounding the table a lot. We like what we're doing. We're on a good trajectory. We need Get more labor back in.

Speaker 2

We need to restore more services, get food and beverage Back on track and other services and we're obviously sensitive, very sensitive as you sort of implied in your question to the cost structure for our owner community, but the reality is the demand is there and we're charging for it. So we have to deliver the experience or ultimately We're going to impair our ability to continue to drive rate if we don't deliver the basic experience. So I'm confident we will. Our owner community broadly, you talk to a lot of them, but I talk to tons of them. They're broadly understanding of it.

Speaker 2

They're supportive. They're seeing The pricing pressure and they realize that we have to work together to get there. We have been as I mentioned in my earlier response, we have been Super crazy focused on making sure that when we get to the other side of this, this is a better setup for our owner community than what we had before the pandemic. And we continue to work really hard on that and we're confident on a comparable basis that they will be in a better place and that Inflation is their friend, it's our friend and cost savings and initiatives that we pursued and implemented during COVID are going to pay dividends for a long time to come.

Operator

Great. Thank you. The next question is from Chad Beynon from Macquarie. Please go ahead.

Speaker 8

Hi, thanks. Good morning. We've heard a lot about airline price increases recently in, I guess, upcoming in the next couple of months. It seems like the operators are pushing through the fuel And I know in your prepared remarks, you noted that March and spring break were strong for the leisure customer. So it doesn't sound like there's been any push At this point, can you talk about, I guess, what you've seen during different cycles as gas prices have remained Elevated and if you think that could impact kind of the mindset of the leisure customer for the rest of 2022?

Speaker 8

Thanks.

Speaker 2

Yes. I've been doing this a long time and we've been studying this a long time. And in fact, I got our team to update the R squared on this just so we Technically accurate, I like numbers. And the reality is if you go back over long periods Of history, there is not a very high R square. There is not a very high correlation.

Speaker 2

In fact, there's a very Low correlation between what's going on with fuel prices and demand in our business. You can go back to like The 'eight, 'nine when oil hit 150 plus a barrel and we went and looked at all those periods and There's not a very high correlation. I think it has a lot to do with the consumer psychology, which at the moment, there's certainly lots of Fears and uncertainty about what where the world goes, but at the moment as I said, the consumer has an abundant amount of savings as Do businesses and a burning desire to sort of get out there and do business and or experience the world having been Locked up a lot more than they would have liked to. So we're not really seeing any of it. Now there's also a phenomenon that is we'll Shift around, but if you looked at our business pre pandemic, sort of roughly 2 thirds of the business, 60% to 2 thirds were fly to and the rest were drive to.

Speaker 2

That's flipped around during During the pandemic and it's still disproportionately the majority right now even where we with where we are in recovery are people driving. So Part of this is there's now gas prices are going up too, but maybe not proportionally as much as the airline ticket is. There is a little bit of a substitution effect that I suspect is going With people deciding they'll drive a little further, right? They kind of get used to COVID like, hey, it might have been a 2 or 3 hour Sort of limit before, now it's a 5, 6, 7 hour limit for what they're willing to endure, to drive. And so it's a long winded way of saying we have not seen resistance and we do not in looking at very detailed analysis of R2.

Speaker 2

We do not historically see a lot of high correlation.

Speaker 8

Helpful. Appreciate it. Thanks.

Operator

The next question comes from Richard Clarke from Bernstein. Please go ahead.

Speaker 6

Good morning. Thanks for taking my question. Just thing I noticed is the number of managed rooms has actually come down quarter on quarter by over 2,000, which is the biggest drop I can find and some quite big drops by brand, DoubleTree Ward of Astoria. Is this a strategy? Are you moving away from franchise towards from managed towards more Guys, if that's the case, maybe why are you leaning away from the incentive fees and the recovery?

Speaker 6

Or is this more an owner led shift?

Speaker 3

Yes. Look, Richard, it's a good question. I don't have quarter over quarter shifts in front of me. You're probably right if you're looking at it that it's a relatively big shift. Some of that is Things converting to franchise, right.

Speaker 3

They're staying in the system. They're not necessarily coming out. And it's not strategic. We still our rooms under construction, Like I said earlier, 80% outside the U. S, that's fifty-fifty managed versus franchise outside the U.

Speaker 3

S. So the reality we go where the demand is, in the developed world, there's a little bit more demand at the lower end right now for new construction, right, and new deliveries. And so we fish where the fish are, right? And so the market takes us there. There's more customer demand and more owner demand a little bit, again, in the developed world Towards franchising and in the developing world, it's about fifty-fifty.

Speaker 6

And just you just mentioned there that you've seen some Shift from managed to franchise, why does that process take place?

Speaker 3

Where does it take place?

Speaker 2

I don't know why. Why?

Speaker 3

Because owner demand I mean customer demand for the product at the lower end and owner demand for franchising. So it's what I mean.

Speaker 2

And if You look at the regions of the world, I mean, the U. S. Has always been a predominantly sort of franchise oriented environment. If you look at our makeup here, That's a majority, vast majority of its franchise. 10 years ago, there was no franchising going on in Europe.

Speaker 2

Today there is. So we have a much more sort of blended approach. It's like fifty-fifty. If you went to Asia Pacific 5 years ago, 7 years ago, it was 0 Franchise now, franchising is particularly in China is growing and it's an opportunity for us With mid market brands to be able to create a network effect much, much faster and we feel super confident in our ability to manage I don't think there's anybody better in terms of delivering great product and great service to customers. So it's driven a lot by sort of The owner desires and sort of the evolution of the business around the world as different parts of the world mature.

Speaker 6

Thanks very much.

Operator

The next question is from Vince Seapull with Cleveland Research. Please go ahead. Thanks. I had a question on cross border. Could you remind us like how much international arrivals is as a percentage of your U.

Operator

S. Room nights? I It's pretty small, but kind of how that business is performing today versus pre COVID, if you've seen recent progress there? And then kind of the other way around, When you look at, say, your European business and North American guests heading there for this summer, can you describe kind of what you've seen With booking behavior in the last few months?

Speaker 2

Yes. Go ahead. Yes, sure.

Speaker 3

On a normalized basis and Pre COVID, the U. S. Is about 95.5%, right? It's about 95% of the customers come from inside the U. S, 5% outside.

Speaker 3

Now in big cities like New York, San Francisco, LA that could be up to 20% for cross border. That obviously plummeted During COVID, right, to near 0 and now is actually approaching pretty close to normalized mix both in the U. Europe is more about 2 thirds, 1 third within the region and outside of the region. And again, that's actually back to approaching levels where it was Pre COVID as the world's opening up.

Operator

Great. Thank you.

Speaker 3

Sure.

Operator

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

Speaker 2

Thank you, Chad, and thank you all for joining us today. I think you could probably hear the enthusiasm in our voice. It's been quite a couple of years, but I do believe that the decisions we made, the actions we took during the pandemic have put Hilton in the best position it's ever been in from the standpoint of driving Performance, margins, driving free cash flow and returning capital to shareholders in the years to come. We're Super excited about what we think is going to play out for the rest of the year and we'll look forward after the Q2 to updating you on that progress. Thanks again for the time

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Earnings Conference Call
Hilton Worldwide Q1 2022
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