Q2 2020 Hilton Worldwide Holdings Inc Earnings Call
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Good morning, and welcome to the Hilton second quarter 2020, <unk> earnings Conference call, all participants will be in they listen only mode.
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After todays presentation, there will be an opportunity to ask questions to ask a question you. My press Star then one on your telephone keypad to withdraw your question. Please press Star then too.
Please note this event is being recorded.
I would now like to turn the conference over to jail Slattery, Vice President Investor Relations. Please go ahead.
Thank you Chad welcome to help <unk> second quarter 2020 earnings call.
Before we began would like to remind you that our discussion. 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 publicly update or revise these statements.
For a discussion of some of the risk factors.
I could cause actual results to differ please see the risk factor section of our most recently filed form 10-K.
Plummeted by our 10-Q filed on May 7th 2020. In addition, we'll 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 and our earnings press release and on our website at <unk> Dot Hilton Dot com.
This morning Christmas data, our President and Chief Executive Officer will provide an overview of the current operating environment, Kevin Jacobs, Our Chief Financial Officer, and President Global Development will then review our second quarter results. Following their remarks, we'll be happy to take your questions with that I'm pleased to turn the call over to Chris. Thank you.
Good morning, everyone and thanks for joining us today before we get started I'd like to offer our sympathies. So all those affected by the recent explosion in Beirut.
Our thought or with our team members and everybody impacted by this tragic event.
It goes without saying that these past several months have been challenging.
Well, we have continued to navigate the global Corona virus pandemic and its impact on our business and the communities. We serve globally here in the U.S.. We've also witnessed tragic accept social injustice, leading to a difficult but necessary discussions regarding systemic inequalities for more.
In a century or hotels have been a walking welcoming place for all a place.
Where we bring together people have all backgrounds and connect them, there's a light and warmed up our hospitality now more than ever held remains committed to fostering an inclusive culture and driving positive change in our communities.
In society more broadly building on the work we have been doing we upset even more aggressive leadership diversity targets across our corporate and hotel teams as we announced yesterday, we're happy to welcome Chris car to our board of Directors, Chris brings several decades of executive.
Leadership across global consumer companies, and we look forward to his insights and diversity of thought as we focus on our near term recovery and long term growth opportunities.
Unfortunately, the new reality of our business required us to adapt our organizational structure moving forward.
During the quarter, we took additional measures to further reduce costs.
Including the reduction of approximately 2100 corporate rolls globally and the extension of previously announced furloughs. These were very difficult decisions as our company's culture has always been centered on supporting our team members, who deliver hospitality for our guests through these challenging time.
Yes, I'm proud of how our team has continued to live our Hilton values to have integrity to deliver exceptional guest experiences.
It'd be leaders in our industry and in our communities, we're working hard to restore confidence to travel again and have taken a number of measures to enhance the safety of our team members and gifts in.
In June we launched Hildan cleans day in collaboration with Lysol and the Mayo clinic to provide industry, leading hygiene practices and our properties all around the world. Our new elevated standards include modifying housekeeping procedures that adjusting common areas in our hotels to support.
Actual distancing that's part of the program. We also recently launched Hilton event, ready, which sets new standards for cleanliness and customer service for meetings in events.
Additionally, we are requiring everyone inside our hotels in the U.S. to where phase coverings and all indoor public spaces.
Long before curve at 19, we had invested heavily in technology to give our Hilton honors members access the seamless and contact less experiences with our Hilton honors at today are honors members can benefit.
From features like digital check in rooms selection and the ability to message with hotel Pete team members from their own device. Additionally, digital key allows for contact list check in and check out at the vast majority of our hotels globally combined with our new approaches to cleanliness. We think these are important initiatives.
On the road to reassuring, yes, I have a safe experience at our hotels at the travel resumes, while still delivering exceptional customer service.
Turning to the quarter as expected the pandemic and the related decreases in global travel and tourism materially affected our second quarter results system wide Revpar declined 81% year over year with all regions and chain scales meaningfully impacted.
Maximally, 20% of our system wide properties had temporarily suspended operations at some point in the first half of the year today, nearly 80% of those hotels have reopened including all of our hotels in China and the majority of our hotels in the United States and Europe, we're seeing steady progress.
On Reopenings as restrictions ease of demand gradually return.
Today more than 96% of our system wide hotels are open and operating.
In terms of demand were seeing meaningful improvements off the lows in April.
With monthly sequential increases throughout the quarter and into July system wide occupancy rebounded from a low of roughly 13%.
To approximately 45% currently with all major regions, improving and Asia Pacific performance is largely driven by rebounds about leisure and business transient travel in China, where occupancy is more than 60% in the Americas occupancy is over 45% boosted by increasing demand for live.
It it service hotels and drive to leisure markets.
During the fourth of July weekend, nearly 800 hotels in the U.S. ran over 80% occupancy across Europe Middle Eastern Africa occupancy is generally around 30%.
Although easing government restrictions and continued reopening should help drive further improvements there as we look to the fall assuming no significant disruptions to the current environment, we hope to see a continuation of the modest pick up in business transient demand, which would help offset slower leisure.
Demand post summer however, we remain cautious given the uncertainty surrounding the virus and its overall impact, including the reopening of schools and offices.
Well, we continued to adjust to new ways of interacting one thing remains consistent are focused on doing what is right for our guests and their evolving travel needs for that reason, we made a number of changes very early on.
We introduced and have since extended the most flexible cancellation policies in the industry and were among the first global hotel companies to implement rewards extensions to help honors member maintain their points and status through our partnership with American Express. We also enhanced our co branded credit cards to include.
You'd more ways for honors members to earn rewards during this time and provide card holders with a greater flexibility and even more points now to use for future travel.
From a development perspective activity was disrupted given the broader macro challenges yet we were still able to add to 7000 rooms through our system and achieved 4.8% net unit growth versus the same period last year.
Monthly openings increase sequentially throughout the quarter ended June openings in the Americas were nearly 15% higher than last year. Additionally, we continue to be encouraged by conversion opportunities, which should help mitigate the impact of construction delays for the full year, we expect net unit growth to being a three and a half the four.
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It will take time for development to fully recover but we're confident that we have the brand and the commercial engines to continue taking a disproportionate share of the global pipeline in the quarter. We signed several notable luxury deals, including the Waldorf Astoria, Tokyo, the Conrad cost the del Sol and Spain and the Oceana.
In Santa Monica, which will join our MSR portfolio on the conversion side, we saw positive momentum across our doubletree curio and tapestry brands.
As an additional testament to the strength of our development strategy during the quarter, We signed a management license agreement with country Garden, what are the strongest players in the Chinese property market to exclusively develop hometwo suites properties in China. We expect this partnership to produce more than a thousand hotels over time.
And look forward to introducing a new brand and segment to the Chinese market as one of hilton's fastest growing an award winning brands. We didn't come to is well positioned to capture additional growth opportunities in the extended stay Midscale segment in China.
Taking the current landscape and uncertainties into considerations, we have a clear path forward I'm very proud of what we've been able to accomplished during these difficult times and I'm confident that we will emerge stronger I think we have demonstrated our flexibility resiliency and an ability to embrace change all while continuing can.
Anything to do what's best for our people and the future of our business would that I'm going to turn the call over to Kevin for a little bit more detail on the second quarter results.
Thanks, Chris and good morning, everyone in the quarter as Chris mentioned system wide Revpar declined 81% versus the prior year on a comparable and currency neutral basis with decreases across all chain scales and regions decreases were largely driven by occupancy declines with rate pressure from increased competition for.
Lower rated business further impacting results. We did however, see sequential improvement throughout the quarter, particularly in China and the U.S.
Adjusted EBITDA was $51 million and the second quarter declining 92% year over year results reflect the significant reduction in global travel demand due to covert 19, and the subsequent temporary suspension of operations at more than 1000 hotels at some point in the quarter.
Revenue declines were mitigated by greater cost control at the corporate and property levels.
Management franchise fees decreased 77% $235 million, driven by Revpar declines and unfavorable timing of license fees.
Our ownership portfolio posted a loss for the quarter due to significant closures fixed operating costs and fixed rent payments at some of our lease properties results were mitigated by cost control tactics across the portfolio.
Diluted loss per share adjusted for special items was 61 cents.
Turning to liquidity, we ended the quarter with total cash and equivalents of nearly $3.6 billion. Following a number of actions taken early in the quarter to enhance our position and increase our financial flexibility.
Additionally, our cash burn during the second quarter was lower than expected, partially due to the timing of certain payments.
As we look at the balance of the year, we remain confident that we have ample liquidity to continue to navigate the current environment and prepare for recovery.
Further details on our second quarter 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.
Chad can we have our first question. Please certainly we will now begin the question and answer session to ask a question you May Press Star then one and then telephone keypad, if you're using a speakerphone. Please pick up your historical core performed the keys.
Withdraw your question. Please press Star then too.
First question will come from Carlo Santarelli with Deutsche Bank. Please go ahead.
Hey, good morning.
Good morning.
Chris you talk a little bit about obviously keep demand lower as we see that.
Yeah.
That kind of a bottoms business transient somewhat offset a a waiting weaker as we move out of the summer vacation month.
Bigger picture as you think about the second half of this year could you talk a little bit about how do you foresee kind of the shape of the recovery.
In aggregate.
Yeah, I'd be happy to obviously that that is the big question and I.
I certainly have a view, although I think there's you know obviously still enough uncertainty out there you know, we're where we it's hard to be confident in the view, but my view really hasn't changed Carlo a whole lot from the last call and if I think about the shape of the recovery, so far which is gone.
From a low of basically a little over 10% to now you know running 45 and moving our way up to 50 that you know well those are still terrible numbers that is a lot of improvement over a relatively short period of time and if you go back to what I said on the last call that sort of what we had expected.
Things are sort of moving you know fairly you know close to what we what we would have expected I said on the last call and I'd sort of stay the same thing I think we're going to you know you're going to see a step change from very very low levels. As you start to reopen the world, where you're going to get to 40% to 50% occupancy.
See levels.
By the end of the summer early fall and then it's going to be a grind up because as you get through the help elements of this crisis, you're going to you're going to be dealing with an economic crisis or or a recessionary environment and businesses and individuals have been impacted and so you're going to be on a grind up from there.
That's sort of what I think is happening I think as you go into the fall you know what I, what I would hope is that you know we're going to be in that 45% to 50% range, you're going to see leisure trail off as you always do but I think a little less so it'll take a little longer for that to bleed off because a lot of kids aren't going back to school or that they are but.
Virtually a lot of offices aren't opening up you know and so there are people are going to be virtual so they have a lot more flexibility to sort of extend the leisure travel season, and we can already see.
Early telltale signs of that because it's been very hard to get availability in certain locations in July and August. So they are extending into September and maybe into October. So I think you'll have a you'll have a little bit heavier leisure business. As you go into the fall, which will be helpful. Because that's been you know significant part of the business.
And you will I think continue to see some.
Movement up and in the end business transient we saw that you know through the quarter I mean, if you look at our managed.
You know, our our managed business transient segment, which would typically be like last year in June was 20% of our business in June of 2020. It was 18% of our business now it's a little bit different makeup of business traveler, then probably it was last year for the last decade or two or three but.
But nonetheless, it you know it was business related travel. So you are starting to see that come back I'm not not you know rapidly, but slowly and I do think all things being equal as you get into the fall you will still you'll see that.
Continue so I think you know I think you're going to.
Hopefully crossover with the pickup dropping off of leisure the pick a slight pickup in in business and you're going to sort of hang out in that arena and be grinding slowly, but surely as we have that are way up you know even with the recurrence of or the of Cowen and a bunch of parts of the country, we stepped back for.
Two or three weeks if you look at the data and then we started the March back a growing back up again and that the grind up again will depend on the you know the trajectory of the overall recovery I think it you know my own view as I said it last time I think it's two or three years, you know to sort of get back to the demand levels that they.
Everything in 18, and 19, but I, but I think I think you know what sort of is that that is sort of the the broader trajectory. We will we will will be in the hopefully 45 50 range and then.
Moving our our way steadily slow and steady up from there I do think there's a there's a decent likelihood I'm not a health expert, but I am certainly talking to a lot of them and folks in the government and the like on a daily basis I do think theres a reasonably good chance that we will have not.
Just a vaccine, but a suite of different vaccines that get approved sometime in the fall that we'll have a different levels of effectiveness, but combined will be reasonably effective and I think that's going to help obviously, that's going to sort I think help move us a little bit more rapidly through the health issues and.
And then just into the economic issues I do think if you get that you'll see some step change in mobility, and thus traveled particularly business travel just because that you know that incremental person that is reticent to travel without it is going to get to have more competence to do it but I still think I stand by.
What I said I think you could have as you couldn't will probably go a step change up on on the occurrence of that you will even without it continue grinding up.
Then you know it will take it'll take some time to get.
As I I don't think we should be under any illusion that even with a vaccine. We're gonna be back. It you know 18 or 19 levels of business transient.
Travel demand for a period of time, just because the economic impact has been significant and it will it will work out then the over over the next through the years, but but it will take time.
Very helpful. Chris. Thank you very much for that and then just if I could one follow up.
Okay.
Actually the three and have to 4% down from what you said before but but at the current environment certainly not not bad.
Could you talk a little bit about kind of what the components of that look like what you're seeing in terms of conversion activity, how aggressive you've been able to be et cetera. That's right. Yeah. I mean, it's obviously carlo lower than what we thought pre covert it's higher than what we thought last quarter.
It's moved up a tick I think we said last quarter about you know mid mid point of our guidance, which would be in the low threes in our midpoint of our current guidance is not high threes and I, probably would probably with what I see today I'd, probably that based on what we're seeing it'd be towards the higher end to that if all if all goes well.
You know I think conversions are going to play a role and as they certainly will be you know we have a lot of momentum. There you know in terms of in terms of the deals that were signing you know <unk> and that are in you know active discussions I think those are up circa 50% you know from from where they were last year and conversions some of the.
That will translate into this year.
And a lot of it will a lot more of it will translate into next year. So I think a larger component.
The Doug will be conversions, but if you know the latest data that I'm, saying is probably 5.456 points I think I think it'll be a significantly more than that next year, just because you know the world sort of while well conversions are you know obviously.
Sort of in keeping with what's going on in the broader environment. You know we went through a period of time at three or four months, where sort of nothing was getting done now we're in lots of active discussions those deals need to be negotiated in some cases, you need to do a capex work you know property improvement programs them and get it into the system and so some of that.
Bunch, that's going to happen this year that said it will have a well have meaningful.
Incremental percentage this year, but I think a lot more just timing wise you know by the by the time things get done we'll be and into next year and I do think you. The combination of that with the properties that were new construction that got delayed because of the freezing of time during you know, particularly most of the second quarter.
Well, maybe next year will be a better not gear of I don't think it'll be back to where we were yes, I think it'll take a couple of years to get back to where we were but I just think the math the math of of how nugget as it is going to work is going to say is going to suggest it does strongly suggest that our three NASA for a sort of the low.
Good point in this cycle and the next year is better and then were then we're moving our way back to a more stabilized environment I mean, what's interesting you didnt ask it but somebody will you know we're still though there are few months that you know everybody's frozen we're still signing a lot of deals and getting a lot of deals under construction.
I mean, I wouldn't hold me to it because data you know is not perfect. These days I'm in the sense that it's hard to hard to know exactly what people are going to do but best our best guess is that we will probably sign.
Well, our signings, maybe down circa 20% or starts right now look like they're down circa 10% and then we already talked about nut.
So that's why the pipeline numbers are looking good as we're still signing lots of deals.
That word eventually going to open and we aren't opening them as fast. So the you know the math becomes pretty pretty simple to explain there. So we're you know I've been.
I've been surprised honestly to the good on a activity on the development side on all fronts I've been surprised on how many deals were getting sign I've been surprised to the good on.
How many are going under construction and as I said, our numbers are sort of inching up.
Which is a pleasant surprise so we're still.
You know, we're still working hard in the country Garden deal I think is a testament to the fact that like you know we're not we're not crying in our milk, we've got a business to run we've got great brands.
This to shell passed we will get back to a more normalized environment and you know we got to be forward look people, who have to deal with the current environment, which I think we have quite well, but we also have to look forward and country garden, which was speed, which we're working on pre coven. Obviously, if it got done is a testament to the fact that.
We are dealing with the here now and we're also dealing with the future all same time, which is what what we get paid to do.
Chris Thank you very much.
Your next question comes from Shaun Kelley with Bank of America. Please go ahead.
Hi, good morning, and thanks for taking my question on patient Yeah.
Hi, Chris to just and wanted to maybe follow up I mean, obviously, some very difficult decisions were made in the quarter as it relates to kind of the broader corporate cost structure and operating structure for Hilton here.
You know how can help us think about what happens as you know trend lines continue to improve and what parts of this.
These reduction need to come back because these were really volume driven pieces of business versus how much of this kind of go forward. You can you can actually you know rethink or or possibly be a little bit more efficient going forward, just any thoughts or color on that.
Yeah, Hey shots, Kevin I'll take this one I'd say look obviously, it's going to be a combination of both of those things right. We do have vault. We do have parts of our business. That's obviously a very complicated business. There are parts that are sort of purely volume and there are parts, where it's not there's not as much volume and we can be more efficient I'd say the way to think about it is you know for our corporate costs for our corporate.
In a you know we gave you guidance last time that would be down around 25% to 30%. We you know we were coming in right along those lines. The most of the moves that we ended up making were largely thought through when we gave that guidance. If that if not you know final decisions had been made but it was certainly factored into into.
Our guidance I'd say in that part of the business the way to think about it as most of the the costs will be sustained cost savings will be sustainable there'll be some elements of.
Furloughs and salary reductions that obviously won't repeat themselves and create a touch of a headwind and then of course, that's offset by the fact that the reductions in force. You know then can annualized going forward, which will be largely permanent savings and so you know as the business comes back some level of you know inflationary type expense growth you should expect.
To come back, but I'd say for some period of time it should be quite sustainable.
Thank you very much.
Sure.
The next question will be from Joe Greff with JP Morgan.
Hi, Good morning, Chris Good morning.
Good morning, Josh.
You mentioned alone and referred to the nice occupancy gains where the portfolios in 45% to 10% I get that 50% and one of the answers to the question.
I was hoping maybe you can frame it maybe you said it and I missed it how how are you doing are tracking from a rate perspective, maybe kind of put in perspective.
Threeq today July Revpar trend.
Kind of benchmark that against that.
The industry day domestically and globally and then follow.
Yeah, I would say you know awaited you know our performance waited for the industry is you know maybe a touch better when you adjust for the difference and methodology, which is that we're keeping all of our hotel even the hotels that closed temporarily who are still close in our comps.
If you if you adjust neustar is not if you adjust for that and we're on top of or a little bit better I'd say on the rate side of things.
We we have seen improvement you know basically for the for the quarter you know at the beginning of the quarter you know rate rate was down.
Of the like April was almost 90% down in Revpar about 35% down in rate. If you look at July you know, that's 25% out and if you look at where the trend line is going.
August and beyond its coming down I mean, I think the rate thing is it really you know we we've had a lot of discussion about it here because of lots of questions on or is the industry going to maintain rate integrity and all that I think you know what is what is really behind the rate issue as we dig in to the data and it doesn't take much digging.
There's not that much data. These days are not as much as normal it's really a mix issue, which is you know we have you know that the traditional customer of ours, particularly has been a you know a higher rated leisure and a higher you know higher rated business traveler there's.
Just not as many of them at the moment traveling for all the reasons that you guys know in so it's a different sort of population not entirely but largely different than we're used to which is much more.
No not to be judgmental, but a much lower and lower price point customer and so that you know the issue for all of us in the industry I can't speak for what others have done that speak for US is we have owners that you know that are really hurting and we're trying to do everything we can to help them because none no businesses build for sort of what was happy.
Thing, which is like the limited or no revenue and they're very very very low levels of revenue and so in this very difficult time, along with our consultation with our owners. Our view was whatever businesses out there to help them we need to go after it and so what's happened is.
Rates have come down largely as a result, I mean, I'm not going to say there isn't rate pressure broadly in an environment like this everybody expects a bargain so yeah theres rate pressure broadly, but if you look at the data if you look at the math the the bulk of it is just mix. We are now in this environment, we have gone after directly some through the.
I would say, but largely through our own through our own channels with honors and all of our marketing campaigns and marketing spend you know lower funnel has been going after that lower rated leisure traveler because it has been the bulk of what is out there to get and we need that we need our own or we need to help our.
Owners get to the other side of this and so when you when you mix sat in its is at its it starts is even pre cobot at a much lower price point and I think so I think that's what's going on where they are I think well they'll be pressure on HDR because of the economic issues that have been cause as a result of covidien it'd be silly to say there.
I don't be <unk>.
Thank you you will get a I think that the pressures that you saw in the second quarter that are still ongoing when you get back to the new Hey, what we'll call what I'll call a new normalized environment, where you have many more of our traditional travelers higher end leisure and higher end business transient.
Travelers on the road again I think this will will right itself is a quite quite rapidly.
Great and one of the answer is is when I talk with my follow up question.
Based on what we were able to ask the team from the release it didnt seem but any kind of third party collections issues with the significant working capital or free cash flow drag in Q2.
One is our premise there correct.
And then two has there been any trend change in the three Q and would you anticipate maybe brings more broadly.
That if there are issues there would be some sort of lag or how do you do that and that's it for me. Thank you.
Yes. Thanks, Thanks, Joe I'd say look what I'd say generally on the collections and broadly working capital side is obviously relative to the guidance. We gave you last quarter things generally went better than we thought and I'd say that's across the board on terms of in terms of the buckets of you know in the managed in the managed portfolio and in terms of payment.
Fees and the like we are you know we do in this in this environment. We have built some receivables we are sort of collecting at a slower pace than normal which is completely understandable given what's going on in the world and give and given you know what our owners are going through but I'd say again, largely you know better than we thought.
Obviously everything that's happened was captured in the numbers nothing's really changed so far in the third quarter, Although we should point out that it's still early in the third quarter and there was little and there's a lot of year left but you know so so far it it's been going quite well.
Thank you. The next question comes from Stephen Grambling Goldman Sachs. Please go ahead.
Thanks, I mean, I'm actually follow up on on that last question on working capital and also tied in reimburse costs, how should investors think about how these will trend in a more sustained recovery I mean do you just get back to breakeven or could you actually get incremental.
Rather were in come in from those relative to the expenses.
Well revenue doesn't get recognized collections doesn't affect the way we recognize revenue and so I think you could see you know in you can see on the PML that you know in the in the funded part of the business or the Reimbursable part of the business. We did spend more than we've done we earned in this quarter, which is completely normal you know if you think about what's going on in the world and how quickly.
Revenues declined I think from a cash basis, we would expect to get the vast majority of it will be repaid and so you should think about there will be a flip around on the cash side that it doesn't necessarily correspond with what you're seeing on the piano and the revenue side.
Got it and then you also referenced.
On the distribution side, a little bit on the neo T.H. here I.
I guess prior to coded I think there was heavy direct booking campaign and there was maybe some hope that consumer preferences may change such that in a downturn you might start to see.
Less focus or less emphasis on the or th given the current environment I guess in some ways. You think would would argue for more inventory going to the out years are you seeing that change in behavior Theres any other data points you can provide that might glean some insight there yeah and pick a good question.
I think I saw the touched on it you know indirectly.
Yes in this environment as you can you just heard but I said about the biggest bucket of demand, which is lower price leisure demand that would typically favor OTN that that is typically what we have views over time, the OTA days for to supplement the other pools of you know our demand that we have very direct access to.
And so you would think you know this would this would mean if you know that our distribution channel mix would be would be shifting in that way.
And but reality is it has not you know our direct channels impart because of what we've been doing because we do want to continue to build direct relationships with customers of all sorts, including these customers, who we hope mange. It may not have been our typical customer before but we hope will adopt our system you know during cold.
Good and post covet and will add to the you know the complement of of Ah customers that we haven't so the let's say business from a distribution point of view as held relatively constant our direct channels are growing at a faster pace and that is as I said that is because of our actions not.
So much and what you know, what we're doing and and you know with the I'd say, but very much how we're spending our marketing dollars and how we are orienting our honors.
Programs to access that that type of customer.
Makes sense. Thanks, so much best of luck in the back half from Tudor West.
Thanks.
Our next question is from Thomas Allen with Morgan Stanley. Please go ahead.
Hi, good morning.
So you guys have obviously had a long experience upgraded hotels and so on some hotel pass a lot of hotels, just big picture. How are you taking the overall hotel operating cost structure will change in the future versus pre target levels. Thanks.
Yeah, Hi, Tom is really good question and I would say.
There's a good answer as always I will give you an answer I'm not I'm not in a position at the moment yet to be highly specific but I will I will certainly answer it directionally and the fact of the matters. We are we're spending probably more time on that right now inside our organization than any other single thing.
We are doing.
For all the reasons you had yes, I mean in the early stages of covet and continuing our effort with our owners because we need to help them. You know bridge. This very difficult time had been to provide a tremendous amount of flexibility against our standards of all sorts. What you know you know in terms.
Food and beverage standards operating out you know across the board and the reality is doing a lot of work with our customer base. That's what they expected everybody knows where in a different world and that things are going to be different.
We will get back to a more normalized world, but we want to use this opportunity to really dive very deeply into each and every brand, which we are doing both the capex and opex standards to see if we can't drive far greater efficiency and now the turn.
Eric is in the needles that that we are not just trying but we will thread is we have the best friends in the business and those brands have the highest premiums in the industry in Kobin World. It's like Anarchy out and you know cross across the world, but we're going to get out of that you know that you know.
They're not too distant future and these brands will continue to have the premiums, but the reality is like any business over time in any industry. You add things you add things you're much you know I would argue you know, we all have been better and adding things and taking things away and so what we're doing in a simple way working very closely you know you know.
With customers is figuring out what are the things that are most important to driving those premiums and what are the things that don't matter and that's the thing that don't matter, where they were from yester year and they might have helped you know 10 years ago, but they don't matter as much today than we don't need to be doing those things and and then looking just at the engineering.
You know, particularly in the limited service space of every single element of the hotel like food and beverage to the Penny on you know cost per occupied room, and the like and so I am I'm not just optimistic I would say, we're going to find for our ownership community significant.
Savings.
At the same time, I believe finding a way to make these brands, even better and even more relevant to customers because we will lean in heavier to the things that matter and get it and get out of the things that don't matter. So I I know in the end you guys like to translate everything to a model and and would like to.
I would like to build a model for the ownership community what that means I can't tell because were rate were literally deep in the middle of it.
And we've got we've got you know a very large group of our most important and knowledgeable owners that are at the table with US we have we're in constant communication with a broad array you know representing our customer base and I think it's really exciting work that you know if you were to take an 18 or 19 sorta norm.
Realized demand level, we will clearly be driving in every one of our brands higher margins just because we're going to you know necessity I used as I've said this too many times in my career, which bums me out that necessity becomes the mother of invention, while I think our brand our brands are the best and drove great margins and we got disproportionate.
The chair of pipeline, because our brands performed better topline and bottomline than our competitors. That's not good enough. We you know right now our owners are suffering it's going to be you know along dig out and and we know we can create greater efficiencies in is the same time not in any way threatened but enhance our premier.
Yeah.
Helpful. Thank you.
The next question is from Robin Farley with CBS. Please go ahead.
Great. Thanks, I Wonder if you could give us a little color on the conversations that you're having with your corporate customers I I don't know if this is a little too early for when you would normally have corporate prenegotiated rates discussions, but our corporate buyers just sort of saying.
Hey, we only have a need to have this conversation call me in six months or what you know I guess, if you could give us a little insight into what your big buyers.
Yeah travel sparkly are saying, yeah, I mean, it is a little about currently Robyn, but it's a really good question and I'd ask it to with you know I think next quarter, we'll have a heck of a lot more to us to say because we'll have had a lot more conversation I would say.
And I'm going to I'm going to put it into Threed Big buckets. Okay. I think you know third a third a third and this is.
I'm being more scientific than reality, but sort of in my own had that's how it plays out a third of our of our big corporate customers are super understanding of what's going on and there of the belief that whatever deal. We had to just continue on and and there's wanna be supportive in this environment they price.
So you know for for a period of time are going to be traveling less but they want to sort of continue on with the basic pricing parameters are that they had and they've signed up for that I would say you know and again I. We haven't you know we're just we're early in the season of this dialogue. So it could change I'd say a third.
I don't know, okay, there is sort of like gosh.
No I don't know what to do this is a crazy world. The you know I sort of here, what you're saying, maybe we should just keep going but there's sort of contemplated and then a third are saying, it's a really crazy world and and we want we got to get a better deal. Okay that we're suffering if we're going to if we're going to travel and we're going to stay with you.
Do we get we got to get a better deal and I would say that's as much as I know at the moment I you know I think in the end you know that third that are in the middle <unk>.
I think you know half of them go both ways I think it's sort of 50 50, you know when I talk to our sales teams and it's all anecdotal for the record. It's not like this is scientific data, but I'm talking to them. All the time every single week at least once you know they'll say, it's sort of like half half of our big corporate customers get if they want to be supportive.
They lack the negative they're not going to be this up and half or sort of like a you know I you know I got I got to get a better deal because the world My world blew up too so.
We'll see how it plays out as I said, there will be an environment, where you get through the health situation and you're in a economic downturn. The there's going to be as there always is some some pressures on rate people are going to expect a bargain for everything most things that there.
Doing I my own belief is.
Is that that will not be intense pressure certainly not reflective of what you're seeing in the current environment as I said or to an earlier question.
Much of the rate degradation, the bulk of the rate degredation as far as I can tell at this point is really just the mix. It's just it's just a different customer base.
There will be pressure, but not this kind of pressure.
On rates as you get to a more normalized environment.
Oh, that's great. Thank you.
Maybe just as my follow up.
So thinking about sort of intentions of travelers can you give color on for group bookings, obviously I'm sure things like we hear from others are you know cancelling through through Q1, but.
Our new group bookings coming in for next year or not really it's their upon again, even people Oh, yes. They are intentions intentions keep picking up I mean, I you know you're right I think all of a legal what we're seeing broadly is.
You know a lot of it we're doing some group by the way the second quarter, we did like 10% of our of our volume was group I think it'll be higher in the third and fourth quarter per what it's worth. So then but again, it's not our typical groups. It's like you know its groups related to the crisis is.
Businesses that in small group meetings, where they just have to do it but their offices aren't really opened yet I mean, there you know and we're getting a lot of that kind of stuff, but I mean, it's yeah. It's obviously you know a small fraction of what it.
What it typically be I do think it'll keep picking up because those sort of other types of groups are going to keep picking up is as year goes on but the traditional bigger group meetings and all that that would that are kind of a bread and butter in the fall those are going to keep getting kicked out a bunch of are still on the book for the rest here, but I think a lot of that will will wash out.
And as you know day by day, you sort of see that washing out and people are kicking the can into next year with again the hoaxes. The health crisis lead path law passed and or you know through a vaccine herd immunity whatever is going to happen and you know the further we go in the year. The further they sort of kick it out because there's a lot of noise.
Isn't the system and it makes some nervous about wanting to spend a lot of time and money planning a meeting they might ask that they might have to cancel so I would say where it starts to stiffen up a bit skewed cute starting in Q2 and next year I think people. The psychology of it is for third and fourth quarter, you'll see groups, but it's sort of group meeting.
Is that a necessity or replacement for something would happen into your office and that will pick up as as time goes on but the core sort of traditional group business is going to kick.
Forward to Q2 through Q4 next year and we are Boes moving business that is canceling we're moving every bit we can and which is most of it to two a future date and we're booking new business. I mean, there you know we are booking tens of millions of dollars.
You know a week up new business for periods in the future most of which is starting in the second second quarter next year. So a lot of it you know again you get it's like the there's so many unknowns you get you get a vaccine it changes the game on on a lot of these things again, you still have the economic situation to deal with.
Some people have still been damage in that way, but I think I think it frees up a lot you know it creates you know a decent amount of momentum because you know the the fear goes away. So I think we just have to.
See where all this you know see we're all all of this goes through the fall I mean.
Again, I feel pretty good about where things are going with vaccines. There certainly is a lot of data out there that says as you get the later part of this year in early next even if you don't have a vaccine you're going to be at a point of herd immunity because enough people are either naturally.
We have the natural antibodies T cells and or have been exposed than away, where it just can't spread the same way that it has again I'm not a hell of expert like you I read a lot of stuff I think I think we just have to sort of get you know watch it really carefully in the fall.
And on the current course, I think all segments will continue to grind up group will obviously be the longest flat because people requires spending planning and right now most people don't want to do that right. They just they don't want to do it because they're afraid their waste waste and.
Time and money.
Does that mean actually that what you have on the books for second half of next year is actually kind of ahead of us.
It would normally be in other words versus the same time last year.
No I don't have the data in front me, but no I don't think that's the case, that's not yet not yet I think it couldn't it could eventually build to that but and if things go well it well I think but not not at the moment no we're not not where where we were.
Thank you thanks treatment.
The next question will be from Richard Clark with Bernstein. Please go ahead.
Hi, good morning, Thanks, very much I'm one of your competitors and said a couple of days the guy that they're expecting business travel to be to see a behavioral change and about a 10% behavioral change I am I right in thinking you don't I'd hate to that I guess that point when they would have to make up to that whether what kind of.
<unk> revenue sources, whether that's skewing more towards leisure rule, using the hotels and a slightly different way and it is that something let's say you won't be or youre looking to contemplate going forward well I think there you know I didn't mean to ply anything on that as far as I was concerned that so if I if I did that's not what I meant.
But in an answer to that question I would say I mean, there's you know there's the raging debate about that that I think we'll be on going over the next.
Three years my belief is as you know from having done this for 37 years and <unk> well, we haven't at a pandemic like this we've had lots of other things.
Lots of other you know similar things that have disrupted the environment that.
In the short to intermediate term you are definitely going to have a substitution effect because people you know businesses have been damaged and as a result, they you know they're going to have to have you know find ways to cut cost and save money and so they're going to substitute zoom in for certain types of meetings, you know and.
It will they will have an impact in the short to intermediate term I think over the long term that there will be and by the way as a result, we of course are looking as we are now at every opportunity of how we utilize our all of our our rooms, and all are public spaces and everything else in creative ways to.
Be able to supplement and find different pockets of demand whether that be leisure whether that be using rooms as offices in an environment, where people are you know opening offices, because we have a safe environment, where people can be socially distance, but by definition et cetera. We're just we're doing all those things I personally believe.
And you wake up in two or three years and you can you can you know, we'll all mark this momentum, let's let's talk in three years I think we'll have a raging debate that you know business travel will never be the same and it will look it may look like that because businesses have been hobbled a lot of them and it will be lower for for a while I've already said I think it.
Thanks, two or three years to get back I think we'll find when wake up in three years it'll be more like it was in 18 and 19 than it is now there'll be a substitution effect there will be different.
They will be certain types of business travel that probably forever will change you know whoever said, 10% God bless them I'm not smart enough to figure that out I've I've read a bunch of Pundant have had views I don't know, but at the same time like every other time there'll be other things and other need for travel that will emerge and so I think while it will take.
A few years to get back I think one way or another we will have similar levels of demand both for business transient and group people will want to Kongregate people will have to meet we'll have to build relationships if anything that zoom and webex I think it has taught us it's really hard.
Card.
To build a real relationship this way so maybe a bunch of internal meetings or what have you know there were some things I mean, that's all we're doing there's some things that I think will be what percentage I don't know will sort of become a more permanent way of of doing things, but they will be you know they will be supplanted by other forms of travel where people are going to.
You know are going to be out traveling for things that that then they haven't been traveling for and so short intermediate term. We absolutely have scrambled every jet we got to think about a weaker business transient demand environment to fill those gaps.
We and I believe longer term it will recover to two similar level.
If I can just all for a quick follow up obviously on your franchise agreements the fee structure is heavily skewed towards a room revenue.
I need to to sort of reopened franchise agreement to make sure that you are aligned with the hotels to drive all these alternative sources of revenue as well.
I don't think so I mean, the reality is in a big full service hotel our revenue our fees are generally based on both.
Food and beverage and rooms, and and other revenues. So in the big complex hotels that already you know we already do that in a limited service hotel, let's be honest there pretty much only rooms. So there you know the you know we don't have a lot of other infrastructure or capacity in the facility in may.
It's limited service like a Hampton Inn, there isn't a lot of meeting space. There you know there and by the way that's part of room revenue and in any event. If there is a <unk> you know it's a small lobby. It's it's a different animal and so really is rooms that you know and those hotels is if you're if you don't have your traditional customers. What other ways can you saw rooms, I said you could.
So as office space you can you can do there there are things that you know that that you sell them as dormitories, which we're doing like crazy right. We've done dozens and dozens of deals across the country with universities, we're doing all those things but that.
But all that flows through room revenues and I think I think the incentives are properly aligned already generally.
Thanks, very much yes.
The next question is from Smedes Rose with Citi. Please go ahead.
Hi, Thanks, I just wanted to ask you can't going back to your pipeline. When you talk with your developers what are what are they seeing are telling you in terms of how banks are thinking about financing new construction at this point and maybe kind of if you could talk about it relative to kind of franchise limited service properties and then maybe anything.
You're seeing on the full service side.
Yeah, I think it's it's a good questions means I think it's a little early I'd say what people are saying everybody is being I mean look we're in the middle of a global pandemic right. So I think everybody's being a touch more conservative about everything I mean, that's why you sort of see you here, Chris talking about us pivoting towards conversions and the like I'd say generally.
Speaking, though projects that make sense can still get finance theres a ton of capital on the world rates are rates are low if people are willing to over it to Equitize you know if they have the equity if they're willing to equitize a little bit more you know they can get deals done and they and their lenders can collectively you know can can collaboratively look towards the future and say hey look.
We're going to open this thing.
Up into hopefully opened this thing up into a new cycle and so generally people are still.
Working on that stuff and as it relates to the mix you know what we were already seeing was much more demand in this in the smaller you know limited service type hotel the bigger more complicated full service hotels, largely didnt get built a lot. This cycle because you know the recovery never justified them building cost kept going up labor cost kept going up and so they.
They really weren't all that active in terms of construction anyway. So that's really not you know that precise of an answer I think because it is a little early but you know you should assume a little bit more conservatism across the board.
Thanks, and then Chris can I, just follow up but can you talk a little bit about the operating model that question came up earlier you know just one thing that's come up with orders is the idea of suspending.
Housekeeping during again stay and making that just kind of a permanent part.
Hotel operating business.
Do you think that's really on the table and does that change the margin from an owner's perspective kind of all else equal.
Yeah, I mean were is rate in the middle of that's me. So I don't I don't really have an answer everything is on the table first of all I mean, we're it's that along with literally hundreds of other things are on the table. That's probably one of the bigger things we have agreed already with our owners in the in the show.
Short to intermediate term to do that as part of our launch of clean stay because we think it is a better protocol for cleanliness did not have third parties in the room and so we clean room, we seal literally put a steel on the door and only if a customer request sit so it's an opt in do we.
Have somebody come in and do a limited cleaning that obviously you know based on the fact that people have been not opting it at a high at a high rate that is helpful. From a margin point of view. We also think it's it's helping from a cleanliness point of view, which is why it was part of cleans day, what we're doing is using this.
This moment, which you know at a minimum that will who will go through this year to figure out with our customers what they really want I mean, what we're trying to do is thread the needle with with our customer and our own or community to make sure that what I said in my earlier comment that we are ultimately, giving our customers what they were.
I want to that will pay a big premium for our product and we're doing it at way that drives the best margins humanly possible for owners and we asked to satisfy both both constituencies and so what we're doing between now and the ended the year is looking at a lot of data and that we're doing it. So we now have a real.
Test that is system wide that is live that is allowing us to look at data to see the behavior of the consumer to talk to consumers.
About their views on this and so it definitely on the table.
But we don't yet have enough data to have it have an answer and I think the ideas that we will through the rest of this year is studying it and figure out based on that data what the right answers.
Great. Thank you appreciate it.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Chris setup for any closing remarks.
Thanks, everybody for the time, obviously, a Q2 not not a shining moment in our 100 year history, but I guess this is what happens when you have a global pandemic we found out.
Lived through a lots of different things over the years and yeah. This is certainly has stressed the limits of I think what all of us obscene, but I'm really as I said my comments I'm very proud of that we've responded I mean, we have taken a difficult situation I think our and our managing our way through it quite well our team has been.
Working tirelessly fewer of them working even harder and I feel as good as I did pre covet about the long term prospects for this business. It may not feel that way to you all right now, but I do think when we wake up in two or three years, we will be back on track in this business will be performing as will the industry quite well.
We look forward to talk India. After Q3, you know every quarter, we learned a lot. So I suspect will have a little bit better visibility into the trajectory of recovery, maybe even have some knowledge on vaccines as all of us et cetera. So we'll look forward to catch any up after after.
Q3 take care and be well.
Thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.
So does that was like the toughest question I had and I was like this where are they trying to like tell me I should say something I didn't know what you guys.
Yes.
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Okay.
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