Q3 2020 Hilton Worldwide Holdings Inc Earnings Call

Welcome to the Hilton third quarter 2020 earnings conference call.

Participants will be in listen only mode should you need assistance. Please signal a conference specialist by Christmas Darkie, followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question. Please press Star then one on your telephone keypad.

Please note this event is being recorded.

I would now like to turn the conference over to Jill Slattery, Vice President Investor Relations. Please go ahead.

Thank you Chad welcome to <unk> third quarter 2020 earnings call before we begin we 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 factors that could cause actual results to differ please see the risk factor section of our most recently filed form 10-K.

Supplemented by our 10-Q filed on August six 2020. 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 <unk> Dot Hills <unk> Dot com.

This morning Christmas <unk>, 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 third quarter results. Following their remarks, we'll be happy to take your questions with that I'm pleased to turn the call over to gross sales.

Thank you Joe and good morning, everybody. We appreciate you joining us today, particularly after what might have been very late night for many that are on the call.

Our third quarter results continued to reflect the impact of COVID-19, However, I'm encouraged by the progress we've made over the last several months travel demand is gradually picking up around the world and occupancy.

Meaningfully up from the lows we saw in April as a result of these improvements I'm pleased to say that we were able to walk them back most of our furloughed corporate team members last month.

And we've been able to successfully navigate the first phase reopening our corporate offices, we've reached important milestones with the vast majority of our properties around the world now open.

Development deals continuing to pick up and customers starting to feel more comfortable traveling again, we remain focused on sustaining our recovery in driving better results for owners turning to the quarter Revpar declined approximately 60% year over year with performance in urban.

Service hotels remaining particularly challenged due to the lack of meetings and events.

Negligible international travel and local cobot protocols system wide occupancy increased sequentially throughout the quarter with all major regions showing improvement however momentum slowed in September well occupancy only slightly better than August levels in the U.S.

Occupancy increased roughly five points month over month in both July and August but remain largely steady in September.

<unk> Labor day weekend, roughly half of our properties achieved occupancy level of 80% or higher given the strong leisure demand as expected we saw a leisure trends slow post summer are offset by a modest uptick in business transit into the fall Asia Pacific led the recovery driven largely.

By domestic leisure travel in China with occupancy levels, reaching nearly 70% in August the highest since December 2019.

Performance in China was further boosted by local corporate transient and domestic group in Europe positive summer momentum stalled in September given a rising corona virus cases, and tightening government restrictions, resulting in relatively stable occupancy levels of around 35% in August and September.

Sure.

Overall these trends are generally continued into the fourth quarter with fairly steady occupancy it's more hotels reopened in rap tempered by continued uncertainties surrounding the virus with more than 97% of our global hotels open and operating we estimate the vast majority of those hotels.

Our running at brief breakeven occupancy levels or better as we look to the balance of the year, we expect trends to remain relatively steady, resulting in fourth quarter Revpar declines in generally in line with the third quarter on.

On the development side activity continues to pick up in the quarter, we signed over 17000 rooms boosted by better than expected conversions, which increased approximately 50% year over year and accounted for roughly 20% of our total signings.

Year to date, we command an industry, leading share of global conversion signings with more than 9300 rooms signed representing one in five deals. Recent notable signings included the Waldorf Astoria Monarch Beach in California, and the Conrad I would die Abu Dhabi Idiot towers. These.

Versions, plus new development projects like the Conrad robot ours Ana in Morocco will further enhance our global luxury and resort footprint.

New development, we continue to see strong interest across our focus service brand with signings up roughly 32% versus the second quarter.

Additionally, we recently celebrated our 500, the Hampton signing in China.

Quarter end, our development pipeline totaled 408000 rooms, representing an 8% increase versus prior year. Additionally, the high quality of our pipeline with more than half of our rooms under construction.

Gives us confidence in our ability to continue delivering solid net unit growth for several years, we opened more than 17000 rooms in the third quarter and achieved net unit growth of 4.7% openings in the Americas were up more than 31% year over year, driven primarily by can.

Versions notable openings in the quarter included the Conrad pointed the meta in Mexico, and the Hilton Beijing <unk> told you in China. Additionally, we were thrilled to open the motto by Hilton in Washington, D.C. City Center, marking our first hotel under the motto Brad.

For the full year 2020, we now expect net unit growth to be 4.5% to 5% with continued positive momentum in conversions. Additionally, we look forward to celebrating our one millionth room milestone in coming weeks since our team came in and implemented the company's transformation 13 years ago. We.

Doubled our size in rooms, and number of brands driven entirely by organic growth.

Our commitment to delivering on our customers evolving needs and preferences is even more important now than ever before in calls for even greater innovation and agility in the current environment to that end. We were excited to launch work spaces by Hilton, which provides guests they clean flexible and distraction free environment for.

Reductive remote working.

Each of our day use rooms includes a spacious desk a comfortable ergonomic chair pretty wide five plus the use of all available business and leisure amenities.

We also announced further enhancement enhancements to previous Hilton honors program modifications that will increase flexibility for our more than 110 million members, including reducing 21, 2021 status qualifications and extending status and points expiration.

Decisive actions relentless determination and unwavering commitment to our core values have helped us successfully navigate what has been a challenging and uncertain environment. They have also helped position us well for recovery were confident that our business model, coupled with our disciplined strategy will enable us to further differentiate.

Yourselves and the industry that emerged stronger and more efficient than ever before with that I'll turn the call over to Kevin for more details on the third quarter.

Thanks, Chris and good morning, everyone and the quarter as Chris mentioned system wide Revpar declined 60% versus the prior year on a comparable and currency neutral basis with decreases across all chain scales and regions.

Occupancy drove the majority of the declines with rate pressure due largely to customer mix further hampering performance. However, we saw sequential improvement throughout the quarter driven by hotel Reopenings loosening travel restrictions in most areas and a pickup in summer leisure demand, particularly in China and the U.S.J.

Adjusted EBITDA was $224 million in the third quarter declining 63% year over year.

Results reflect the continued reduction in global travel demand do that due to the pandemic and related temporary suspensions at some of our hotels during the quarter.

Management and franchise fees decreased 53% driven by Revpar declines.

Overall revenue declines were mitigated by greater cost control at both the corporate and property levels with corporate DNA expense down approximately 38% year over year.

Our ownership portfolio posted a loss for the quarter due to temporary closures fixed operating costs and fixed rent payments at some of our leased properties.

Cost control measures mitigated losses across the portfolio.

Diluted earnings per share adjusted for special items was six cents.

Turning to liquidity, we ended the quarter with total cash and equivalents of nearly $3.5 billion our.

Our cash burn rate improved in the third quarter, given gradual recovery in the macro environment further.

Further helped by continued cost discipline and better than expected collection.

As we look ahead, we remain confident in our in our liquidity position and ability to navigate the current environment and recovery.

Further details on our third 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 thank.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.

If you are using a speakerphone please pick up your handset before pressing the keys.

Try your question. Please press Star then too.

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

Hey, guys. Thanks for taking my question.

On a girl Goring, Oh, gosh look in terms of of the pipeline.

Sorry, I talked about.

Half to 4%.

Expectation for this year.

Spoke to the high end of that range.

Now obviously.

More Chris spoke a lot in your prepared remarks about kind of the packed up conversion.

The percentage of conversions I believe you said was 20% up to 17000 sites in the.

Corridor as we move out further into 2021, 2022 et cetera can you talk a little bit about the role that youre foreseeing portfolio conversions in that unit growth and maybe potentially also talk about what what sales.

This year or is it just more construction partner.

It's going to get to that party terms.

So we're close to the finish line.

A little bit in advance of what you thought they would.

Sure, there's a bunch there, but let me let me unpack it I think I can I can pretty successfully do that yeah that starting with this year you know our numbers have been moving up over the last three.

Three or four months on on net unit growth now being four to five and that is exactly what you suggested in the question that's because things have gotten back under construction more rapidly than we were initially assuming and that means that we're just delivering more this year than we thought we would which is a good thing and we didn't conversions.

While the bulk of that benefit is going to be seen I think in 21 and 22, just because of the lag effect. We are seeing more conversions in the year for the year than than we had been anticipating which was reflected in signings being up in the third quarter by 50% and so the flow through of that as how we're getting to the.

Four and a half to five I think as it as you think about conversions going forward you know last year. It was you know and I'll do this directionally because it's very early and obviously, we're not giving specific guidance, but directionally you know.

Last year, we were in the high teens in terms of the percentage of our dogs that was in conversions this year.

Obviously, we will see an uptick for 500.

Hundred basis points on that again, recognizing that there is a lag even though these happen a lot faster than new builds there is time to renovate properties in many cases get them into our systems and the like so it will be you know if we were in the teens will be in the low to mid Twentys and I think that number will keep creeping up you know I've said many times over the years.

Ears.

In the last in the last in the Great recession, I think we picked out close to 40% I don't think we will get that high even though in this world we have more brands to play with it in that sense. It then we really had one and doubletree now we have doubletree and three soft brands.

We're bigger yeah, we have a a broader development story than we did from a global point of view in those days and so I do think it will it will grow from you know low to mid Twentys beyond that and then 21 and 22.

And you sort of asked it and I know, it's on everybody's mind, so while the mine development and Doug Health finished the story as we it's very early and I wouldn't take this is like hard guidance, but I would I would take it like everything else in covered world as there's good direction and we've done a lot of work around it as we think about no good and as we've talked about you know certainly.

You know in the last call over the next few years, we think it's probably best we can tell in the 4% to 5%.

We're going to be you know a little bit obviously better than that this year. You know next year. You know we have a bunch of stuff that will deliver that's been in motion conversions, but we feel comfortable in that range, because even though we will have a drop off obviously and naturally as a result of fewer things getting put under construction because of the financing markets.

Right now we still have a lot that already is in production and coming through and we will supplement that with conversions, which by definition effectively have already been financed so I think that's the way I would think about this year. That's the way to think about the next few years that were sort of somewhere in that four to five zone trying to be more precise than that at this.

Point, I think it would be difficult, but we'll obviously keep keep you updated as time goes on.

And Chris just a quick follow up on on on your your response, there that's 4% to 5% range is there is there an air pocket anywhere it there as you think about maybe the financing.

What that could potentially kind of impact the 2022 or 2023, whatever it may be a lead time or do you think that's pretty consistent steady.

Although I <unk> you know it depends on how much success, we haven't filling what will be you know a decline didn't do newbuilds with conversions and it's just looking that far out is hard to do that's why I would just directed to development <unk> you know the four to five and I think you know best that we can.

Modeling and that's all it is for us, but it's based on a lot of experience and the trajectory, we see and what's already in the pipeline and what's already under construction and what we see in activity and conversions. We think the next few years will be will be within those boundaries.

It doesn't mean it will be in the middle every year, it could bounce up and down a little bit based on our projections, but that's about as precise as we can be yeah.

And in the moment.

Got it thanks.

Huh.

[laughter].

The next question will be from Joe Greff with JP Morgan. Please go ahead.

Hi, good morning, guys.

Kevin you did a commendable job and haven't done a commendable job on controlling.

Gionee costs.

Although you have.

The furlough.

Yes impacts in the DNA line, not replicating themselves going forward.

Not so much for the fourth quarter, but just maybe over the next couple of years, maybe you can just talk about the picture.

Do you think when a rep pardon fee recovery scenario.

How you bring back incremental gene a expenses what is that relationship. So I think we.

I don't think of it this way in in other words, if we.

Think about 2022, if you're at 80, 85% 97, whatever that number is.

22, Revpar as a percentage of 2019, what is that you know relationship wise for free Gionee looking back at 2019 at the baseline.

Yeah, I think look obviously, it's a very fair question I think you've identified some of the offsetting things right. I mean, I think if you think about I know you didn't ask about the fourth quarter, but if you think about the fourth quarter. It's a similar dynamic for 21 and 22 right where you you you sort of lose the benefit of the furloughs that we had over the course of the second and third quarter, but you gave.

In the run rate benefit of the reductions in force that we've had and some of the other cost control measures that we've put in place. So I'd say look I mean sort of similar answer to no gets a little bit early to be giving you a refined look at 2021, and certainly 2022, but the way were thinking about it is that most of these savings should be semi permanent meeting there will be.

A point at which the business grows to the point you know a few years from now where you have to start adding back for that but for the foreseeable future. Most of the savings should be semi permanent and we ought to grow plus or minus inflation over the next couple of years and that's probably as much guidance as we are comfortable giving at this point.

Right fair enough. Thank you.

[music].

Our next question is from Shaun Kelley Bank of America Merrill Lynch. Please go ahead.

Hi, good morning, everyone I want to.

Good morning, Chris Sue Kevin in your prepared remarks, you talked a little bit about just sort of where we are with the cash burn piece and I was just wondering.

Can you just kind of lay out for US you know directly or a clearly is is the corporate entity sort of on a run rate or monthly basis are you guys that you know cash burn you know neutral or even positive at this point or what does it take to get there and then maybe just a follow up you know just straight up it would be on how were kind of the broad.

Her working capital on franchisee collections going how is that relationship with franchisees you know playing out and how would.

Would you characterize some of the risk around any collection at this point.

Yeah sure. Thanks shot I mean look I think the I'll take the second part first I think the answers are obviously pretty very related you know.

The relationship we have with our owners I describe is really positive I mean, just to just to put that framework out. There I think everybody is doing the best they can and I think people to the extent that they can pay us are paying us and obviously you saw over the third quarter with a burn of plus or minus $100 million that was Sir I think better than most people's expectations incur.

Leading our own so so far we're having a very good experience on collections and again everybody everybody is doing the best they can in terms of you know going forward are we at breakeven I'd say, we're getting there I think all things being equal on collections and if we have a similar experience over the course of the fourth quarter.

You know I'd say will be equal to or or maybe slightly better than the third quarter will be the fourth quarter experience again, if things kind of go.

The way, we think they're going to go or they go the way they've been going we do have a couple of timing items like as you know we have a pretty large interest expense payments that just hit in October and things like that but again, I think all things being equal it'll be equal to or better than the third quarter and the fourth quarter and what does it take to get to cash flow positive. We're almost there probably just a little bit more.

You know a little bit better demand and a little bit better operating performance and you're there.

Thank you.

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

Hey, good morning, good morning binding Carlo and.

Oh Carla's question earlier, you had obviously very solid net unit growth and solid cost control. If we put the two together what level of Revpar decline versus 2019 would you think you'd be back to 2019 EBITDA levels, perhaps taking it one step further to 2000.

19 levels of free cash flow and what are some of the other puts and takes to think about that might influence that.

Thanks for the question, obviously, its a little bit difficult to be precise with you and then in the sense of building building the model for as much as I'd like to and we do have a model and if you put those two things together I think that you know sort of implied in your question is.

You will you will get a free cash flow and EBITDA levels of 19 before you necessarily get back to demand levels of 19, because you have created a much more efficient cost structure I think that is a reasonable assumption and that is certainly what our models would show that when we get to the other side because of what Kevin said and what I said, we will keep growing throughout.

We will have more units producing you know on a more normalized levels of demand against a lower cost base. The math is pretty easy that means. We're you know when we get to the other side of this and and weren't under more normal time, where we're a meaningfully higher margin business that you know because we have cut a lot of cost and.

We're going to continue to keep those cost out of the business.

With some basic inflationary pressures on on growth and so I can't give you a number we're not going to give guidance of any sort, particularly multiple years out, but I think if you.

Do basic math and assume what we've already said publicly you can pretty easily get there you can see what we're saying and unit growth you can make your assumptions on revpar, we've given pretty solid guidance on you know we think our DNA structure is going to be down 25% to 30%. This year. My guess is it'll be towards the higher end of that when it's all set.

And then and then it's just the arithmetic after that so we're not going to finish the arithmetic part of it we'll let you do it but I think your your baseline I.

I think what is implied in the question is correct, we will get to EBITDA and free cash flow of 19 before we would get to demand levels of 19 for those reasons.

Right and I guess one other just quick follow up is just as we think about working capital or other components of cash flow, whether it's capex or otherwise is there anything there that we should be cognizant of that that could be different relative to where you were trending kind of pre call, but I don't think so.

No I don't think so I mean, obviously on Capex, we've we've reduced capex numbers in this environment like every pretty much everybody on Earth are certainly in our industry in most industries.

I think as we get back that you know I think Theres opera double normalized then be more like it was but there will be efficiencies I think will will garner in that and I think again when you get to a normalized environment I think the working capital things sort of go back to the way they were.

Fair enough I'll jump back in the queue. Thanks, so much okay.

The next question is from Thomas Allen of Morgan Stanley. Please go ahead.

Like your so thank you for the color earlier that you kind of expect fourth quarter revpar trend to be somewhat a third quarter, but can you give us a little bit more color on what you're seeing right now by region. No. Obviously, we can look at third quarter results, but are you seeing increased closings in your.

I'd be curious to hear how impact continues to improve or not and then just related corporate rate negotiations there should be going on right now kind of what are you hearing through those conversation. Thank you. Okay. Jay Thomas Yeah, There's a lot there too, but let me unpack it and see if I can I'm not one for being succinct as you know but.

Let me, let me try and be so regionally, it's pretty much what you guys have been writing about what you've been seeing the here and now is that notwithstanding you know what's going on in the U.S. forget the election, but you know a resurgence in kind of virus cases, we've seen here sort of steady steady as she goes so to speak we haven't seen.

In any event.

Surreal backward act or activity in terms of mobility and the man now depending on what happens you could but we have we've seen it remain reasonably steady I'd say Europe and middle East is going backwards modestly for the reasons that you would expect and so as we think about the.

Fourth quarter, we've more recently been sort of knocking our numbers at expectations down because of locked down that sort of obvious.

If you look at Latin America, you know I would say so goes the U.S. sort of Latin America is generally in keeping in terms or trajectory and then Asia Pacific really led by China. I think you know outside of China Asia Pacific feels a lot like what's going on in the U.S. I hate to.

Make it all one big bucket, but if you put it all together, it's sorta does and then China as its been well documented continues to sort a motor along and you know we continue to see yeah pickup in travel and in all segments and so when you put it all together.

You know Europe is definitely going a bit backwards Asia continues to move a little bit for U.S., a sort of steady and that's kind of why we get to a fourth quarter. That's about where we are if we look at October numbers, which we don't have final numbers, but that sort of supports it you know.

There is risk in it I'm not going to do or not I mean, depending on what goes on here in the U.S. and other parts of the world with the virus you there's risk it could it could go backwards, our best sense of it at the moment is you know people are sort of figuring out how to manage their own risk profile and as a result, there getting you know there's a lot of data and information.

No there are not as long as their countries aren't locking them down and I think it's unlikely the U.S. will lock down the whole country. You know there is some level of mobility that I think will likely allow us to maintain this level of sorta operations that.

We've been saying for a period of time and then the you know the you know the next step is like when do you see the next step change and you know my own view is I think you see that in the spring I think we sort of hold our own between here and there I think the you know we'll get at election behind us, which will take some of their out of the balloon regardless of outcome.

I believe that you will start to see <unk>, you know a lot coming out of the vaccine world, particularly maybe more out of the therapy world but.

But but vaccines on multiple in multiple cases that will have some level of effectiveness that we'll be able to be mass produced sometime late this year. Early next year you get through the winter season, the flu season, and I think there's a real opportunity for a step change and and and attitude and and as a result of a step change.

In performance as we took a look at our segments theres sort of reflective of that you know honestly. They all agree with me, but it's sort of that's what you see going on leisure is sort of.

Okay coming off the summer season on the last call. We said, we thought leisure would be stronger into the fall than normally just because people aren't open offices as aren't open in lot of cases kids are back in school. So people have more mobility for leisure purposes. That's exactly what's happened you know we've seen we've seen continued stay.

Frank not as much as the summer, but continued strength, we've definitely seen a business a pick up in the third quarter and in the fourth quarter of business travel, it's not the traditional customer you know and Matt on mass that we would typically be a housing, but you know, but business travel is picking up and group.

There is group I mean in the third quarter, you know, we did about 10% group, which is probably about half of what we normally done the groups are different they are more related to the crisis.

Sports teams things like that but there is some group.

The the big return of the group buy thing does it really occur until hopefully you get to that moment that I talked about next spring, where we're and we're sort of shifting into a different gear in terms of the health crisis, and a and a and vaccines as it relates to the last question I think I unpacked at all a court rate negotiations.

I you know, we've actually done really well I mean, I think the biggest issue on corporate <unk> uncovering negotiates is really how many people are going to show a lot less to me about the rate. Although obviously rates are important but like how many people are going to show up under those programs next year premature to say I think it will follow the trends broadly macro trends that I that I just described it I think.

You know give at least or what I believe in terms of rate negotiations. We've had great success everybody knows this is a knows it's a really difficult time, we're now through the majority of those negotiations and in the majority of cases, our customers have agreed to keep the 2020 rate structure not in every case, but in the end the majority of the cases David.

Agreed to do that recognizing you know the difficulties of the times and so.

We feel actually pretty good about that hopefully that.

Answers your questions plus a little color.

That's great. Thank you very much <unk>.

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

Hi, good morning, and.

Thanks for taking my question good to hear all well.

You you have largely addressed the two major buckets that I wanted to ask you about but I'd like to just take the prior question a little bit further.

Much thinking have you sort of put into you know flexible strategies around you know what EPS. If you know the timings on therapeutics, and so forth or the effectiveness or distribution et cetera.

And I mean, specifically around you know the buckets of demand, which you know have include a majority from you know business versus leisure and how you sort of fill up your buckets should you have to as things move forward.

Great Great question, and what are we talking about around the table I'm sitting at every Monday morning, with when we have our executive Committee meeting I mean, the reality is as you might guess, David well that is I gave you a view of what I think and I think most of our team thinks will be the sort of the contour of the recovery from from this point forward.

We're not counting on that that that is what we think that is what we hope a time will tell I mean as my father used to say SUNFISH, where the fish are and right now the fish are where they are which is you know certain <unk> a lot of leisure you know frankly, not the typical leisure customers the lower rated leisure sales.

Sales and business travel is a different type of business smaller business sales forces.

Frontline folks I'm responding to the crisis I'm the group business again isn't the traditional group, but there are groups out there that are having to me you know we're we're a housing a lot of nobody's back a lot of people aren't back and offices. So they need to have places to congregate a meeting.

Since they're not in their office you heard me talk about work spaces by Hilton using rooms, that's work spaces, particularly for people that need to get out of the house and need wife, I need some space and privacy and so I can keep going.

All our marketing campaigns have shifted as youve seen if you've been watching that all our efforts with honors have shifted and pivoted. So we're quite mindful of.

What is going on where the fish are to use to use my metaphor and intensely focused with our commercial teams on delivering and getting more than our fair share of which I'm happy to say we are if I look at our you know our relative results in the <unk> in this environment, we're doing very well.

B to B share. So we will continue doing that but then the trick is this isn't going to last forever and so it's not like this will be our new strategy forever. It's great. We're honing some new skills that we didn't need to have in a.

And when we get to the other side of this and we get back to more normal demand environment. We won't have let those muscles atrophy, but now we'll have other other skill and other tools in our tool kit and you know pricing is all about generating a lot of demand. The more demand you can generate the higher the price you can charge and so as we think about it it's sort of like really dig in and refine this.

This tool kit and as we get back to more normal times take the best of both worlds to put more demand in the funnel. The ultimately you know intermediate and longer term yield a price price price accordingly.

Well, we're we're super Crazy focused and think about we have we're a fiduciary for you know thousands of owners that are in the <unk>. The most difficult difficult circumstances in the in their careers because as the worst thing in our industry has seen and our job is to make sure that we're helping them build the bridge to the other.

Outside of this and so it's it's a it's one foot in the here and now one foot in the future, but both sabal planted.

Got it thank you very much appreciate it.

And our next question is from Robin Farley with RBS. Please go ahead.

Great. Thanks, I wanted to go back to the topic of unit growth because I know you mentioned conversions for 20% of total signings in the quarter I'm just wondering what percent of openings. They were in the quarter. Just just given the increase in your unit growth since last quarter I'm wondering if that's conversions driving they were about just what they were.

20 in the quarter and they'll be as I I think I already suggested on prior comment a bit more than that for the full year, but.

But we do expect that that those percentages will creep up and 21 and 22.

So the the increasing your unit growth for for this year from just a quarter ago sequentially is that more just construction projects getting back on track faster.

Both were doing were doing more I mean, while most of the benefit of conversions is going to happen in 21 and 22, we're getting some deals done that the world's opening up fast enough, where we're going to open a bunch of incremental conversion hotels in the year for the year that we didn't think we'd open plus yes, now I'd say you know the vast majority.

You already have things that were under construction 90, 90 plus percent of what was under construction. When we went into the crisis is back under construction and they are making really good progress. So we as we assume sort of a lag effect when things got up and going it would take a while for things to wind backup but honestly the consumer.

Direction trades around the world, particularly here in the U.S., we're ready to go and they've been work in a ready to work and so active.

Activity picked up a lot faster. So we're just those two reasons are why we're delivering more this year.

And then just when we think about maybe some that did get pushed into next year just from your kind of you know pre cobot original guidance.

It sounded like your guidance for next year is in that kind of 4% to 5% range.

Are there some things that were originally in next years.

Openings that just have kind of fallen off that didnt end up going forward.

Not much no I don't think much changed a little bit more will open this year, which would have probably we would have assumed would have pushed into next year. So that pulls the little bit of that out of next year into this year, but we still feel as I said I'm not being evasive. It's just really early to be you know hyper precise I mean, we can do at this.

Point, we're deep enough in the year that for NAFTA, five we can be pretty precise because.

Some stuff might fall in or in or out, but but over the next few years as I said, we think we are in the four to five range and we're not we're not we don't you know you have to give us some time to ultimately get a little bit closer to be more precise.

Yeah, Robin if I, just add a little bit to that I mean, I think the way the way you're thinking about it logically makes perfect sense I think though you got to think about when we first said half or a little bit better we were at the very beginning of the crisis in the depths of it and construction and a lot of construction as Chris said had been suspended and we really didnt know when it was going to come back.

You know online. So we're just we're further into it we've had a better experience with construction getting back up and running than we thought and you know I wouldn't I wouldn't sort of over think the way it affects the the future years.

Okay, great. Thanks very much.

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

Yes. Thanks good.

Morning, everybody.

Hey, Chris given the positive comments from Kevin on the cash burn nearing zero and.

And your discussion of cost cuts margins going forward I'm, just wondering how much confidence level you could provide.

He might return to sure.

Sure repurchases as we look forward to 2021.

I think it's a it's a really good question I think it's a little bit premature. We will we will we have not changed long term our philosophy on return of capital.

And that is we believe somewhere back in a more normalized environment that we're going to produce gargantuan amounts of free cash flow, we don't need a lot of that to grow because we've got the best brands in the business and we think we can continue to grow organically. Thus that capital is best given back to our shareholders largely in the form of buyback our philosophy hasn't.

Changed.

Yeah, it's a little bit premature to say exactly when we get back on that program. Obviously, our leverage levels have gone up as a result, you know if you look at our net debt to actually won't have gone up your rare, but our EBITDA as you guys can calculate in your models, even though we haven't given you guidance has gone way down. So you know we're going to want to see our debt.

EBITDA levels come down before we start you know back up with a with a share repurchase program that doesn't mean by the way that it has to come necessarily all the way back down to the ranges that we've historically said, but we'd want to see that we are solidly two feet on the ground in the next stages of a recovery.

That are that are our debt to EBITDA levels are headed towards a more normalized level and given where we are now which is in you know feeling really good about where we are and great about our liquidity and thinking you know the spring is going to be when we shift to shift gears.

I think all of those things I said, all the things that we have to we want to see those things happen. So I think I think it's a it's a fabulous question I know people want to know hopefully that gives you some context I would think about it but but we're not we're not in a position at this at this moment to say when exactly that will be.

Understood I appreciate the time thanks, yeah.

Yep.

And the next question is from Smedes Rose with Citi. Please go ahead.

Hi, Thanks, I just wanted to ask you noted about 97% of the rooms are open so I realize it's a small percentage of the room base, that's close but it's that's skewing that chunk of like 25, 30000 rooms is that skewing towards the owned and leased portfolio or is it more across the board and do we see any any of that.

So maybe not reopening the i.

I think the vast majority will open to answer the last one first there may be a few here and there that don't but I think it skews very heavily to urban destinations and in the U.S. and then Europe.

But that's what it skews very heavily towards you I mean, obviously with Europe going backwards, we still had more to open in Europe, and now they've gone back and locked down so our progress there slowed we may have some hotels go back into suspension.

In Europe, and then in the U.S., it's almost entirely bigger urban you know bigger urban hotels, the bigger urban markets that are suffering the most but so does that actually I guess, then that would skew also to kind of the owned and leased portfolio, which I know, it's small, but well see we don't actually all of our owned and leased hotels are at the outset.

Open at the moment now we do have some hotels that are in some of the parts of the world that are going down a lot. It got really a weaker yen in your in Europe, and the UK, but so we could have some that go back but at the moment all of our.

Yeah. That's good it skews heavily towards me the management franchise, almost I would say very heavily towards manage and to a lesser degree franchise.

All right. Thank you guys.

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

Hi, Good morning, Thanks for taking my question I, just want to ask a question on loyalty how much it loyalty being a boost to your cash flow through the last couple of quarters. He still getting money from the credit cards I suppose is the follow up to that.

You will probably come out of this crisis with a big loyalty liability. They normally would have on how do you think about managing that with regard to cash flow over the next couple of a couple of years and how does that feed into your thoughts about what the balance sheet should look like.

Yeah, Rich I'd say generally right I don't think we will come out of this with a materially higher liability than we have if you think about the you know the it's a complicated equation of what we take in and what we put on the balance sheet in terms of the liability, but it all it does self regulate in the sense that when rates are lower the cost of redemptions is lower the folio John.

Does or lower you know and we run the whole thing generally breakeven and so it's not it's not a material contributor either way to our cash flow. There is a portion of the credit card remuneration that as ours as you can imagine credit card spend is down.

So that those those that remuneration is down although not nearly as much as revpar. So it's not it's not a big swing one way or the other.

Great. Thanks.

Sure.

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

Hi, good morning, everyone morning.

I Wonder if you could comment about.

What you're observing for group booking in cancellation trends for both one Q2 Q of next year. Thank you.

Yeah, well, it's probably not going to shock you I mean, we are booking business by the way in the or for the year is still a not insignificant amounts, but as I said earlier, it's <unk>. It's for unique types of group meeting smaller corporate beatings in lieu of people being in the office.

You know sports related group and and groups related to recovery efforts and crisis related efforts as if you look at more traditional group bookings or re bookings because obviously our objective is to try and rebook everything humanly possible that that is getting canceled this year and we've done.

I think a very good job of doing that I would say at this point, what we're booking a lot of booking and rebooking increasingly significant business into next year I would say very little of it is into Q1. Some of it is into Q2 and the bulk of it is into Q3 and four and that's for the reasons that sort of.

I've been implied as opposed to what I've said I think everybody is sort of like on hold for the winter season, let's get through the flu season, let's get these vaccines sorta out through phase three you know and see if we can't start putting shots and People's arms and so if you're planning a big group meeting you know you just at this point that you're in.

In November you're not doing it in the first quarter, you're you're a little hesitant on second quarter, although some of that is happening, but the bulk of what we're booking which is picking up at a pretty good velocity is index second half of next year and beyond.

Okay. Thanks for the color Yep.

Next question.

Question is from Anthony Powell with Barclays. Please go ahead.

Hi, Good morning, Tony You mentioned good morning, you mentioned that you saw increased interest in your select service so.

Randy could you maybe tell from whom are there from new developer, it's different types of owners and given kind of the relative resilience in that segment the cycle.

That leads to more interest in those brands going forward and a higher share for you in the development pipeline and to keep the next cycle.

Yeah, I think it's a good common sense Glee. The reason we're seeing it is because I do believe that we have a lot of owners that are that are that are still very very strong I think there of the mine that if you're going to build the best time to build his during down cycles. So that you deliver things into an up cycle I think many of them fall into.

Our you know sort of select service, you know development community and they're looking at this as an opportunity to maybe pick better sites, you know with the best brands and sort of locked lock their position and then go out and see if they can get it financed and get it going with the belief that they'll deliver you know deliver and.

Significant upswing and so I would say, there's certainly some I mean I'll, let Kevin answer there is certainly some new.

Owners, but I'd say, it's really our you know almost all of it I. My sense is there anecdotally is from our existing owner base. The other thing is this is the stuff that can get done right. I mean, Bobby This is was the trend pre Kelvin the bulk of it if you look at the U.S., particularly the bulk of what was getting done in the U.S. was all in the limited service space.

That was true that it's even more to now just in terms of the economic model behind it the margins that they can run a cost to build and all and all that fun stuff. So I think it's I don't think it's a particularly new thing I think our brands are really really strong they deliver incredible share I think people want to take advantage of the crisis to.

Listen themselves with the best opportunities for when they get to the other side.

Yeah, and probably just worth adding Anthony we did mention that in the prepared remarks that was that that was quarter over quarter growth I think in signings in in focused service I'd say broadly speaking the skew between existing owners and new owners, probably a little bit more existing because I. Just think you have to be pretty well healed and the development world to get something.

Done at this point, but worth noting that our both of both our approvals and signings over the course of the third quarter were about one third full service two thirds limit select service or focus service.

And pretty well distributed geographically and that's all pretty consistent with prior what we what our experience in prior quarters in prior years, so not a lot of new there.

Thank you.

Sure.

The next question is from Jared Shojaian with Wolfe Research. Please go ahead.

Hi, Good morning, everyone. Thanks for taking my question.

Can you just talking about how occupancy trends have evolved in China, specifically, whereas business travel versus leisure travel today versus the prior peak and then just one unrelated clarification. When you say junaid down 25%, 30% does that mean the entire year. In 2020 is down 25 to 30 or should we assume fourth quarter is also down.

Down 25 to 30, and that's the run rate level going forward.

That is a the full year 2020, and I'll, let Kevin talk about China, Yeah, China for you know during during the third quarter, China was about a 50% leisure or 30% corporate 20% group, so that was a little bit.

You know little bit less leisure and a touch more group than in prior quarters I actually don't have in front of me, where it was to prior peak I suspect you know still skewed more towards leisure than it would have been in on a normalized basis.

Okay. Thank you.

Yeah.

The next question is from Vince sequel, with Cleveland Research. Please go ahead.

Great. Thanks, I wanted to touch a bit on distribution you talk about what you've seen over the last couple of quarters in terms of direct business versus new T. air share and it's coming through this pandemic as you evaluate distribution going into next year years into the future on a recovery of demand.

Great strides driving more direct business and just curious if this changes that at all or further accelerates the gains you've seen on that path. Yeah. I don't think I mean, what's interesting is I don't long term I don't think it changes anything I think if you if you looked at like our other T.A. percentages through Q2, they were tracking pretty good.

System with where we've been over the last couple of years Q3, they were up as as we would have expected just given the base of business, which was not frequent non oil leisure business. You know during the summer that was you know that as you know more OTI a oriented so it was up not not in any.

You know alarming way, but it was up and we expect that it and we wanted it to be up in the sense that we wanted access to customers.

Our our attitude on the long term hasn't changed our attitude with you which is they've been good partners for certain types of business, we love working with them through the crisis, there's been plenty of pockets of demand that have been helpful to us and our ownership community work with them on but at the same time as you point out we've been on a long term.

Trajectory and doing co bid similarly to build more direct relationships build more loyalty give customers more reasons through what we're doing with our digital platform. What we're doing with honors that value proposition and the like to what we're doing now with clean staying.

Cleanliness and hygiene and all of the things that have come out of the covert crisis, you know to get people more reason want to come directly to us and so you know in a more normalized demand environment. I think you know the things that we've done in the crisis are going to put us in a really really good position to continue down the path of building even more direct relationships.

Even more direct business.

In the interim we are going to obviously do a bit more business with the OTA because it's the right thing to do in terms of distribution mix. The majority of our disposition comes from direct channels almost three quarters of it comes from direct channels. I mean, the thing that's been interesting there's been some shift outs, which wouldn't which wouldn't surprise you I mean, if you would ask me.

This you know a year ago I would have said gosh, it's hard to imagine, but whats happened is you know our percentage of direct has stayed about the same it's just shifted where.

Hotel direct has gone way up and art and digital channels. The other channels have gone down which seems crazy, but it's just the type of business and people you know that the you know literally we have we have two thirds of our business is booked within within a within seven days and like 40% of it almost is booked within the day and so it's a lot of.

Like drive to business people pick up the phone and call. It like the old days, obviously that won't be that won't be maintained and then the O.T. a swap out so the overseas have gone up a little bit, but what what has gone down as the GDS on the on the other side. We you know we could argue about GDS sort of effectively being a direct channel the way, we think about it but we don't.

But what what has happened is you know the GDS has gone down because the traditional corporate business that comes through that has evaporated to a large extent and it's been replaced by O.J. type business. So ironically when you net it all out we're almost in the exact same place, but you know, but sort of a funny world for the moment.

I have every expectation is as we get into more typical demand levels that those things will all go back to more normal.

At a more normal trajectory and I feel very good about what we're doing vis-a-vis honors and our customers to keep building direct relationships.

Appreciate that.

The next question will be from rich Hightower with Evercore. Please go ahead.

Hi, Good morning, guys. Thanks for taking the question here.

I was hoping to get you to opine a little bit on short term rentals and when you think about the the recovery and maybe some share gains in that segment over the course of the summer and through Labor day did that surprise you at all.

And you know Chris you've made comments in the past about how it's not precisely the same customer.

Hilton is going after but you know what.

Would you make that same statement today. Thanks.

Really good question and it doesn't really change my you know my view in the sense that I you know I I won't make you suffer through the whole thing because you guys know that I do believe that you know.

Fundamentally a different business and I were in the branded business, where we take very consistent product.

Very consistent you know service delivery amenities wrap them with a product loyal to wrap it all together and we sell it for a premium versus something that is new that satisfies the customers needs, but it's not going to have the consistency the service the amenities.

Could have loyalty, but at the moment doesn't really have loyalty and the results as a result more of a value proposition I. Just think we fundamentally believe we're in the hospitality business and we get the premiums we get because we do something different and that our business is good and that their business is good right, but that but there you know and while they're related there fundamentally we're trying to do different things now.

Not at all surprised I had every expectation that this would be good for them just think about what I said about where the business is coming from the bulk of the business. This summer was value oriented leisure business that is that is like a bulls eye for those for those platforms and so that's great for them a and if you had.

An expectation that that is all the demand that was going to be available that this was a secular shift it would be an issue I do not believe that I believe that when we wake up and see what three years and incrementally over those two or three years, we will get back to a more normalized environment in terms of demand and that what we do the people have been willing to pay a big premium for they will.

Continue as we get through this crisis to to want to stay with us and pay us that premium. They will also for certain stay occasions want to stay with them for a different type of value proposition. So it wasn't surprising to us at all it makes all the sense in the world just given the if you look at the the bucket of demand.

The biggest bucket a demand that's out there at the moment.

Great. Thanks for the comments.

You bet.

Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Chris and set up for any closing remarks, well. Thank you everybody for joining us up everybody that didn't get rest get some rest today, we'll see what happens with all these crazy elections here in the U.S.. We appreciate the time, obviously a lot going on in the world like going on with the bid.

Yes, we feel as I said in my comments really good about the progress. We're I think we're set up you know certainly from a liquidity point of view in a really good place, but I also think in terms of what we've been doing for our ownership community. What we've been doing with our customers that we've been taking care of our teams are what we've been doing for our cost structure point of view I do believe in my heart of Hearts that when we get through that.

To the other side of this were a bigger better stronger more efficient a higher margin business and so we'll look forward to continuing to update you on the as the journey unfolds, thanks and have a great day.

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

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