Q4 2020 Hilton Worldwide Holdings Inc Earnings Call
Good morning, and welcome to the Hilton and fourth quarter and full year 2020 earnings conference call.
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I would now like to turn the conference over to Jill Slattery, Vice President Investor Relations. Please go ahead.
Thank you Chad.
Welcome to Hilton's fourth quarter, and full year 2020 earnings call before and again, we would like to remind you that our discussion. This morning and will include forward looking statements actual results could differ materially from those indicated and the forward looking statements and forward looking statements made today speak only to our expectations.
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 factors section of our and most recently filed form 10-K and supplemented by our 10-Q filed on November 4th 2020 and.
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 and our earnings press release and on our website at IR Dot Hilton and 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 and Global Development will then review.
Our fourth quarter and full year results. Following their remarks, we will be happy to take your questions with that I am pleased to turn the call over to Chris.
Thank you Jill and good morning, everyone. We certainly appreciate you all joining us today and I hope everybody is staying well.
I wanted to start with semi difficult I want to start by extending my most heartfelt condolences to the sorensen family and.
And the thousands of Marriott associates around the world following the heartbreaking news of <unk> passing.
To say I'm deeply saddened and by that loss it would be an understatement.
And as many of you know and.
And the opportunity to work with Arnie and a number of capacities throughout my career and.
Including earlier on at host.
And it gets very fair to say he was an exceptional leader, but also and incredible person.
And a great friend, our industry is better because of him and I am a better professional and a better person because of him on behalf of everyone at Hilton.
And as family and the entire Marriott family, our and our thoughts.
As we all know this past year has presented unique challenges, including a pandemic that devastated lives communities.
And businesses across the world widespread economic declines and acts of social and Justice.
Due to the extraordinary levels of disruption.
Our industry experienced demand declines, we've never seen before and our 101 year history.
Guided by our founding purpose to make the world a better place through the light and warmth and hospitality, we acted quickly to ensure the safety and wellbeing of our people. We also took steps to protect our business by right sizing our cost structure and enhancing our liquidity position, while continuing to drive net unit.
Growth and increase our network effect.
And as a result of these moves we expect to recover from the pandemic as a stronger higher margin business.
That is even better positioned to deliver performance for our owners and strong free cash flow for our shareholders.
Well, it's certainly been a very difficult year, we're proud of everything we've accomplished but we certainly could not have done it without the support of all of our stakeholders for that I'd like to extend a heartfelt. Thank you to all of our loyal customers are important owner partners, our communities, who supported us and innate.
And that's to support them.
Our team members, who gave their hearts and souls to our business and our shareholders who stood by us.
Because of our amazing people, we've been able to lean on our award winning culture, which earned the number one best place to work and the United States for the second consecutive year, and then number three worlds best workplace to help get us through these trying times.
Turning to results for the full year system wide Revpar declined 57% with adjusted EBITDA down only modestly more.
Illustrating the resiliency of our fee based model and we also demonstrated the strength of our brands and power of our customer centric strategy by achieving market share gains across every region, even and a distressed business environment.
For the quarter system wide Revpar declined 59% relatively in line with our expectations the positive.
Momentum and demand that we saw through the summer and early fall was disrupted in November December by rising Covid cases, tightening travel restrictions and further hotels suspensions, particularly in Europe.
Similar to the third quarter drive to leisure travel drove an outsized portion of demand be.
Business transient and group trends showed modest sequential improvement versus the prior quarter, but overall demand remained quite muted.
As we look to the year ahead, and we remain optimistic that accelerating vaccine distribution will lead to ease and government restrictions and unlocked pent up travel demand for.
For the first quarter overall trends, so far and appear to be similar to the fourth quarter with modest increases in demand and the U S offsetting stalled recoveries and Europe and Asia Pacific.
We expect improving fundamentals heading into spring with essentially all system wide rooms reopened.
By the end of the second quarter, we expect a more pronounced recovery and the back half of the year, driven by increased leisure demand and meaningful rebounds, and corporate transient and group business.
Over the last year, the personal savings rates and the United States has nearly doubled increasing by more than one six trillion dollars to $2 nine trillion dollars with the potential to go even higher given additional stimulus. We expect this to drive greater leisure demand as travel restrictions.
<unk> ease and markets reopened and tourism. Additionally, conversations with our large corporate customers along with sequential upticks and business transient booking pace year to date indicate that there is pent up demand for business travel and that should drive a recovery and corporate transient trends as the year progresses.
On the group side.
We saw a meaningful step up and new group demand in January with our back half group position showing significant sequential improvement versus the first half of the year with.
And with roughly 70% of bookings made within a week of travel overall visibility remains limited. However, we continue to see signs of optimism in fact, the vast majority of our large corporate accounts agreed to extend 'twenty 'twenty and negotiated rates into this year.
Despite the challenges and 'twenty, 'twenty, and we up and more than 400 hotels totaling nearly 56000 rooms and achieved net unit growth of five 1% slightly ahead of guidance.
Fourth quarter openings were up nearly 30% year over year.
Largely driven by new development in China, where our focused service brands continue to command a disproportionate share of industry growth.
We also celebrated our one millionth room milestone and the openings of our 300 and hotel and China are 600, and Doubletree Hotel and our 900 Hilton Garden Inn, we ended up the year with 397000 rooms, and our development pipeline up 3% year over year.
While market disruption weighed on new development signings conversion signings increased more than 30% versus the prior year.
And as owners look to benefit from the strength of our network. We anticipate continued positive momentum and conversion activity, particularly through double tree and our collection brands.
During the quarter, and we signed agreements to expand our Curio collection, and Mexico and bring our tapestry collection to Portugal. This marks one of several and several new tapestry hotels scheduled to open across Europe. This year, we also announced plans to W. L XR and the Seychelles with Mango House Seychelles the property will.
River, a truly unique hospitality experience with spaces guest rooms, and suites, and five world class food food and beverage venues.
Scheduled to open in the coming months the hotel underscores our commitment to further expanding our resort portfolio builder.
Building on that momentum, we kicked off 2021 with an agreement to bring Alex sorry to Bali. Additionally, we celebrated the opening of Oceana, Santa Monica, which Mark Alex Ours U S debut as well as the Waldorf Astoria Monarch Beach resort and the Hilton and Vancouver, downtown which was converted from a competitor.
Brand with these notable openings and many exciting development opportunities in front of US we are confident and our ability to continue delivering solid growth over the next several years.
The pandemic rapidly change guest behaviors priorities and concerns we listen to our customers.
And moved quickly to launch modifications to our honors loyalty program deliver industry, leading standards of cleanliness and hygiene with Hilton Cleans day, and provide flexible distraction free environment for remote work with Workspaces by Hilton Additionally, with and even stronger focus on recovery last am.
Month, we implemented Hilton and event ready hybrid solutions and expanded set of resources to help event planners to dress the dramatic shift towards hybrid meetings as group business rebounds, our flexibility and innovation drove continued growth and our honors and network ending the year with more than 112 million.
And members, who accounted for approximately 60% of system wide occupancy.
And throughout 2020, we also remain focused on our corporate responsibility and our commitment to our ESG initiatives, we're proud to contribute to our communities and we're honored to be named the global industry leader and the Dow Jones sustainability sustainability index for the second year in a row and and.
Earmarked by challenge and change we effectively executed our crisis response strategy carefully managed key stakeholder relationships and continue to press forward on strategic opportunities and I'm confident that there are brighter days ahead, and that we are and a stronger more resilient and and.
We are better positioned than ever before and with that I'm going to turn the call over to Kevin for a few more details on the fourth quarter and the full year.
Thanks, Chris and good morning, everyone before I begin I'd like to Echo Chris's sentiments about Arnie My thoughts are certainly with his family and with my many friends at Marriott, who I know are hurting this morning.
During the quarter system wide Revpar declined 59, 2% versus the prior year on a comparable and currency neutral basis as the pandemic continued to disrupt the demand environment relative to the third quarter occupancy was modestly lower partially due to seasonality and further tempered by rising COVID-19 cases and associated <unk>.
Restrictions <unk>.
Adjusted EBITDA was $204 million and the fourth quarter down 65% year over year results reflected the continued impact of the pandemic on global travel demand, including temporary suspensions at some of our hotels during the quarter.
Management and franchise fees decreased 50% less and Revpar decreased as franchise fee declines were somewhat mitigated by better than expected honors license fees and development fees.
Overall revenue declines were mitigated by continued cost control at both the corporate and property levels for the full year, our corporate G&A expenses were down nearly 30% year over year at the high end of our expectations.
Our ownership portfolio posted a loss for the quarter due to the challenging demand environment temporary closures in Europe, and fixed operating costs, including fixed rent payments at some of our leased properties continued cost control measures coupled with one time items mitigated segment losses for.
For the fourth for the quarter diluted loss per share adjusted for special items was 10 sets.
Turning to our balance sheet, we continue to enhance our liquidity position and preserve our financial flexibility over the last few months, we opportunistically refinanced $3 $4 billion of senior notes to extend our maturities at lower rates and January we also repaid $250 million of the outstanding balance under.
Our $1 75 billion revolving credit facility.
On a pro forma basis, taking these transactions into effect as of year end 2020, we lowered our weighted average cost of debt to three 6% and extended our weighted average maturity to seven two years, we have no major debt maturities until 2024 and maintain a well staggered maturity ladder thereafter.
Further details on our fourth quarter and full year 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 our question and answer session and.
And to ask a question you May Press Star then one on your telephone keypad.
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And the first question will come from Joe Greff with J P. Morgan. Please go ahead.
Good morning, guys.
Yeah.
Chris I, just want to start off with a big picture question I'm sure you'll get a lot of questions about 2021, net rooms growth and how you're thinking about pipeline growth from here, but Chris I love to hear your thoughts on how Youre thinking about your business three years out post vaccine.
What's different about.
About your business and in terms of individual business transient travel group travel leisure travel relative to pre Covid, what what's different do you think about full service and limited service development and the future relative to pre COVID-19.
Yeah, It's a great great question and yeah. So a lot to unpack there, but I think you know what you know Joe and you go out and obviously you could debate this and I have debated it AD nauseum of a lot of people I think it when you go out three.
Three years, whatever you know three or four years I think demand is going to look a lot like it did and 17 18, and 19 and meeting the make up of.
The business has between business transient leisure transient and group at that at that point in time, I think will look quite similar now certain of the types of.
If you get underneath the demand, particularly in business transient and the group side might be for different reasons, then and I mean, there'll be a substitution effect clearly and certain types of travel being substituted with you know sort of the the news you know the zoom calls and digital opportunities, but there'll be replaced with other form.
And travel and that you know we've seen this.
Throughout history I mean, if you go back you know and.
And you know it wasn't really round, but the telephone and the internet and telepresence and.
Voicemail there they're always the arguments that this is going to truncate, the need to travel and and congregate and the reality is what it what it typically does is it accelerates it right because it just gives more efficiency at speeds and ultimately speeds things up and ultimately continues to connect the world and and.
And speed up globalization and as a result people need to congregate they need to travel they need to build relationships they need to build cultures, they need to innovate and those things really you know cannot be done as well without them face to face opportunities both in group and a group setting as well as.
Individual business travel type needs.
Needs and so I, you know having done it longer than I'd like to admit and a $35 40 years and.
We've been debating this I don't again, I think there'll be some substitution effect, but I think it'll look a lot like it did and then our business. You know you know a couple of comments since since you asked and our business is going to be a better business and a stronger business and a faster growing higher margin business why because listen.
Throughout the next three weeks three years, we're going to continue to grow for a 5% unit growth. So we're gonna be a bigger company. The units that we had pre COVID-19. If you believe what I believe which is you'll have similar demand levels will be producing like they where you'll have all of these new units that are then and going to also be producing and.
And you have a lower cost structure, because you know we've taken a significant amount of cost out on a cash basis sort of you know you know if you look at on a run rate and this year sort of on a cash basis and the mid teens, something like that maybe a little bit better.
And we're gonna be incredibly disciplined as we always are bad and I think we've been on a G&A basis, you know at the low and the of of spending and.
And the industry, but we got even better last year and that's good and when you put all the same flows of fees.
Through the system with more units and a lower cost structure, it's simple math.
And with the higher margin business and so.
I know, it's sort of an odd time to be you know pounding the table with optimism and so I probably shouldn't but.
As we sit around this table and with him at our board table and we talk about it it's been a hard year the hardest any of us have ever endured but as a result of and we put ourselves and about the best position, we could have and honestly I think the business is going to be better for it and I think it's going to produce higher.
Higher margins and more free cash flow, which we're going to be which is going to allow us to return even more capital than we were pre COVID-19 to our shareholders, which you think over the very long term is going to drive incredible returns.
The last point was on limited service full service and I'm not you know and you know I I'm covering a lot of territory I know, but you asked these things and I think it's an important note because it's something I talked a lot about pre COVID-19 that you know frankly, I don't I don't think got enough attention, which is the mega trend and our and the industry and <unk>.
Free market and the World. There is not an exception is the mid market right. That's why is that because that's where the bulk of the population is that's where the bulk of the population growth is particularly and the emerging markets.
And so what can those people afford mid market brands I would say I know I'm sort of padding and something we have the best mid market brands and the world is being proven out and the growth of those brands and.
Both in the U S, but outside the U S outstripping the competition and Europe, outstripping, the competition and Asia Pacific, particularly China.
And that's not by luck, we've been very purposeful over the last 10 years and making sure that we take the best brands here and we adapt those and refine those from a product and service.
Our point of view, we picked great development partners and like.
We've done in China to make sure that these are these are you know adapt.
Adapted to those environments, what the customers want and what the development community and those environments and those and those regions want that.
It's allowed US you know to show really strong and growth and continue to so you know the mega trend, which was before Covid and I would say as a result of the economic distress that this has caused only gets.
Accentuated and a post COVID-19 world as the mid market and I feel really really good about the work that we've done and to put ourselves and a good position and I think it's showing up I think it's showing up and the numbers of our unit growth right and you know because the bulk of that unit growth I mean, we have lots of great things going on and luxury we're making tremendous progress.
Yes, there are lots of great things going on and full and you know and the upper upscale and all that but you know.
The bulk of it you know you see particularly in this environment the bulk of the growth all over the world is really coming and limited service and.
I've been saying it for years, if you wake up and 20 years and you look back and say where is the bulk of the growth and demand and thus the bulk of the growth and rooms, it's going to be it's going to be in the mid market and that's why we've been focused on everything, but so intensely focused and that because and the and that's what's going to drive.
Higher growth rate that is what having the best brands in that space that we adapt to the local market conditions is what's going to deliver alpha for us the real alpha over the next 10 or 20 years.
Great. That's helpful. Appreciate it Chris Hum.
Sure.
Your next question comes from Carlo Santarelli with Deutsche Bank. Please go ahead.
Hey, guys good morning, and thanks for all day and Carla.
Please go out fast.
And should we tightened and obviously Tom.
Carla we can't hear you very well could you speak up a little sorry.
I'm sorry, guys can you hear me a little better yes, yes, sorry.
I appreciate you taking my question.
You spent some time off.
And about how you're thinking about.
Yes.
Hello.
We'll be about 19.
Yes.
For 2020, how do you see conversion activity represents.
The growth algorithm over the next call it 12 to 24 months.
Obviously, they will be used to augment.
See that converts and per se.
And it's kind of peaking out.
And next two years.
I think and I got all that you are kind of cutting in and out so I'll answer what I think I heard and if I, Miss something and come back and and remind me so <unk>.
Doug.
We feel the same way we have felt over the last couple of quarters.
We obviously delivered a little bit better at 5.1, because we had a huge fourth quarter in terms of deliveries.
But we've said over the next few years, we think will deliver 4% and 5% and I still feel really good about that.
I think this year, it'll probably be more of the midpoint to the high end of that you know again and you know similar similar to last year, but I think over the next few years, we feel we feel comfortable with that and in part you know leading to the what I heard is the second part of your question is the success that we're having on the conversion side.
We've always been focused on conversions and and downturns as everybody knows that's you know that's very fertile ground.
Over over the past five or six years, we've gone from having essentially one conversion brand and really that was the big engine, which was doubletree to now having four between our three soft brands and double tree all of which are producing.
For us and and I think we'll continue to escalate I mentioned in my prepared comments, our signings for conversions were up 30% last year, our starts which I did not mention probably should of where we're up 40% and our.
Our fourth quarter, our opens were up about 44%. So what you see happening is sort of natural like it takes a little bit of time to ramp Youre right. We were circa 20% of overall, Doug and conversions that was up three or 400 basis points versus the prior year and I think what youll see over the next few years is that.
Will become a larger and larger component of our overall nut.
How high will it go you know, which maybe it would be the next question. So I'll answer it unclear.
And the great recession, it went into the forties.
Don't think it will go that high because I honestly think we have so many other engines firing, particularly in China with all of our limited service growth.
Compared to the great recession, and I don't think it'll go that higher but I think could clearly go into the upper twenty's low thirties.
Over the next few years and so we have <unk>.
Tremendous amount of focus on it.
As you would guess you know and and the development teams are are aligned around those goals and I think you are starting to see with some of the numbers that I described the natural ramp up and that and very very good progress. There. So I think I think things are coming along really nicely.
Did I Miss did I Miss anything and your question.
Sorry.
Thanks, very much alright, thanks Carla.
The next question is from Shaun Kelley with Bank of America. Please go ahead.
Hi, good morning, everyone and thanks for all the remarks.
Chris or Kevin maybe sort of going down the same path.
Did for net units on digging in on the G&A cadence, a little bit a little bit more.
Obviously, I think there's some noise with stock based comp but.
Chris I think you referred to overall kind of cash and expense savings and and a higher margin profile restructure and looking out a few years could you just help us kind of build on that a little bit is as you kind of look out a little further what's either of the right run rate to think about relative to 2019 levels for 2021, or just maybe even more strategically.
How much more efficient.
Do you think we are a few years out from now versus where we were we ended 2019.
Yeah, Sean I'll take that one I think you sort of pointed out some of it right on the GAAP G&A side.
<unk> stock comp that's non cash right. So over the course of last year, we wrote down our plans and then we put in and a new plan in place and the fourth quarter. So you saw some things bounce around and then overall and ended up at 30 on a cash basis. We ended up I can't remember if Chris you said this and your first answer but on a cash basis, we ended up about 20% better.
2020 over and over 2019, and then I know Christy I'd say this we think 'twenty one versus 2019 will be down and the mid teens on a cash basis and so how can that trend going forward I think look overall wages and benefits have been growing in excess of core inflation.
And so over time, that's probably not going to trend, but we've look we're adding no new heads and the business. This year and so we think for several years, we're going to remain disciplined as we always have.
And as you know and there's no reason to think that we can't grow cash overhead it sort of slightly ahead of inflation. There is slightly more than inflation, because that's probably what wages and benefits wants to grow over the next few years and there is nothing that we see and the future that says we can't continue to get back to scaling the business without having <unk>.
<unk> changes and growth and overhead.
Thank you very much sure.
Yes.
Your next question comes from David Katz with Jefferies. Please go ahead.
Hi, good morning, everyone alright, good to hear everyone's voices.
You too David.
Thank you.
Christian and your comments, you talked about pent up demand for corporate travel.
And you made some comments around group and I'm, hoping that you might be able to.
Go just a little bit further and talk about how broad based that might be any industries et cetera.
And so obviously quite intuitive that leisure would have a lot of pent up demand, but we spend a lot of time debating those other segments.
And we just love a little more depth. If you have it available yeah I can give you I'll give you what I do have I mean, I talked about and my prepared comments David.
The leisure side and you and I think we all I think we can all kind of stipulate that people want to get out of their basements and.
They want to travel and while people have been starting to do that not that many have and certainly the higher and leisure business says has not really been out and about and so I think as you get through.
What is going to be a mass vaccination period of time over the next 90 days I think when you get to late spring and summer.
Everything I am hearing talking to the bite and administration, which you're now reading and the papers too, but we're having pretty direct conversations I think maybe even sooner I think the president and said last night I heard that by the end of July every American.
We will be able to be vaccinated my own belief based if you look at the manufacturing curve and expectation of J&J getting approved probably by the end of this month that that could be much that could be.
Sooner than that and the middle of the summer so.
And once you get there I think people have a lot of savings, even though they've been buying and stuff like crazy as we know because a lot of other retail and car business and homes and all that had been doing well they want to get out and they want to get out more than ever talked to anybody talked to any of your friends and you get the answer and so I think I think the trend.
And there will be quite good when and when you get a bit of the all clear sign which I think will be.
Hopefully by spring certainly nothing there were no worse and summer and on the business transient and there you know there are data points I mean, what you know, but a lot of it is admittedly anecdotal and the sense of just discussions that we're having with our big customers.
And trends that we're seeing and you know as we're having discussions with our customers as we've been renegotiating all of our negotiated corporate negotiated accounts I mean, clearly there there is massive pent up demand I mean, they may you know by the way.
They there obviously and businesses that are hurting they're gonna have cutbacks from maybe their run rate numbers of 18 and 19, but the reality is they just in the short term. They have so many things that they need to do when you talk talked to them about.
Collecting their people innovation.
And I guess just team meetings.
Getting out with clients and customers and the like that you know.
It's been over a year by the time, they are out and it'll be 15 months and.
Forget the fact, they want to see people they need to see people and so you're starting to see that even though we are in the U C infection rate coming down I mean, we're still not through the crisis for sure.
And you're starting to see it and the booking trends I mean.
And the business transient trends are clearly sort of week by week are marching up even in the middle of all this even though we don't have the all and all clear sign. So you know not tons of data other than a real booking data suggest you know short term it is moving the right direction, but lots of.
Conversations with customers are saying that and lots of surveying that we're doing is suggesting that.
And that people are more.
Interested and travel for leisure and business.
Oh, Yeah as are pulling goes like over 80% of and say you know they've got to get back out on the road, which is the highest number obviously we've seen since this mess began and so that's good and I'm the group side.
That's going to take longer but the but the trend lines are.
Are good.
If you look at like our our lead volume.
Fourth quarter versus January January was up 35%.
And at January versus December was up 50% I give you the quarter because normally January would step up from December because of the holidays. So you don't want them and I think a better number would probably be sort of the average over over the whole fourth quarter, but that that's up by more than a third.
A stat that I.
And as I go through with the team that I thought was very encouraging on the group side was that our first half position.
And for 2021 versus <unk> 19, so, let's forget 'twenty because it was a wash out.
And the comparability is not relevant if you look at it versus the stabilized here of 19 <unk>.
First half position on the group side system wide is down 80%.
The second half of the year versus the second half of 19 is down by 32%. So again, its still off but you know.
By a lot lesser margin and that's a result of people, saying I got to get out I want to get out and I wanted I got to have team meetings I Gotta have small group medium sized group conventions are starting to book again, because theyre going to go out of business if they don't.
If they don't get bogey again with an expectation obviously, but by the time you get to the second half of the year that it's safe and they can do it.
From a health point of view and so we need the this and.
My belief is we will get there, but we need this vaccination effort between now and June July to really ramp up and it and it feels like day by day.
Happening so that's a little bit.
Color obviously.
We got we got to play out the next few months and and have the right things fall into place, but I think there is a.
I think theres, a real opportunity for us.
And I said this publicly I think bloomberg or somewhere but I do think there's a great opportunity for the second half of the year to be better than any of us thing.
Because when you know it looks like everything when you are at the top of the cycle you always think everything's going to stay good forever and it's a new norm and when Youre looking from the bottom the depths of Doom youre sort of trend lining off.
A lot of negativity and eventually this thing is going to flip and people want to get out no matter, what anybody says they want to travel and.
And the all clear sign of sort of given which is the lights at the end of the tunnel and I think coming soon and.
And I think I think there's a huge amount of pent up demand and I think I think we could all like what we see and the second half of the year.
I appreciate it and if I may just a very quick follow up on.
On the subject of hybrid segment or <unk>.
Any thoughts strategies, our marketing efforts to that and.
Yes, I mean, all of our efforts on the marketing side, I mean to keep it short and simple and we can let other folks ask questions.
All of our efforts have been focused on fishing, where the fish are and right now you know what.
And where the fish are at the moment is in sort of value based leisure and Bleser business. So you know and it's really the <unk> part of it is small and small businesses that really don't have the choice, but to travel to keep their businesses going and they are sort of.
Mixing it with leisure opportunities because they have more mobility and a sense, they're not locked into their kids arent locked into necessarily being and schools and theyre not locked into being and an office. So all of our efforts across what we're doing with honors what we're doing with promotions, what we're doing with our with our marketing spend have been focused on.
And that now that's all going to obviously shift.
If all goes well and I'm right.
And we're obviously working on the plans to not go immediately back to.
To where we were but to start to migrate back to sort of a more normal approach as demand per.
Turns become more normalized.
Thanks, very much good luck.
The next question is from Stephen Grambling with Goldman Sachs. Please go ahead.
Good morning, Thanks for taking the questions.
Good morning.
And your comments on the second half 'twenty one trends those are those are all helpful, but perhaps coming at it from another angle, how did leisure business and group segments Fair and China in the fourth quarter before incremental Lockdowns and how would you compare and contrast that market to the U S. As you think about how it may inform the trajectory of a recovery once cases or reined in perhaps as it related.
Follow up are you seeing any signs of that substitution of trips that you're referencing in that market.
And obviously, China as you implied in your question and sort of backed up with what's going on and particularly in the north of China more than the south of China.
And the first quarter and the fourth quarter I would say and I have all the data in front of me, but I would say anecdotally from lots of conversations with our Asia Pac and our China team.
It was very rapidly sort of approaching normal fee, meaning we werent fully back with that there was still a little bit heavier leisure component, but there always is in China by the way.
Heavier leisure market broadly, but we werent too terribly far off of our business transient and our group trends, but it was following.
The same pattern I would expect here leisure leads business transient is a close second and the groups just because they are by nature of group business, a little bit longer lead time is a little bit more planning.
And was lagging a bit but.
China.
We were we were running like 10 points off something like that so we were getting before they backed up we were getting to I think very normalized levels of demand we were not seeing any material as far as we could tell you know with the data we had any sort of substitution effect reality as China was sort of going back.
To the normal trends that would add very rapidly before COVID-19 and so I think while China's different you know and lots and lots of ways. I think humans are humans and I think it's why my belief is that as we sort of come out of this leisure will lead business transient will be a fast follower group will take a little bit longer to <unk>.
And because lead times, but you know, but the demand.
And patterns will over a couple of years return and look a lot like they did.
Pre COVID-19.
And one very quick follow up just can you remind us what percentage of the China business is normally international inbound.
Which I would imagine you'd have to overcome to get to that 10 points off.
It's about 10 10 points.
And then 10%.
Awesome. Thanks, so much I'll jump back in the queue.
The next question will be from Bill Crow with Raymond James. Please go ahead.
Good morning, Christian Kevin and Bill.
Got it.
Two parter on.
Unit growth.
First part of it is.
Are there economic differences to Hilton.
Between adding a conversion double tree or say opening a Hampton Inn and that is newly built and.
And maybe that's a year one versus year three question.
Yes, I mean, the differences and I think.
You already answered sort of implied it just timing I mean conversions conversions.
And just happened faster, most and not always in the year for the year, but typically between signing and getting them and the system and paying fees that happens very rapidly usually within six to 12 months and signing of new builds depending on where and the world. You are it takes anywhere from 12 to.
48 months, and so conversions produce produce faster I'd say in terms of <unk>.
Ramps and underlying economics, I mean, I'm looking at Kevin runs development and Theyre not.
Not a not a material difference as I think about it I don't have that data in front of me, but anecdotally, we're involved that Kevin and I were involved and all of these deals.
Don't think theres any real real difference in terms of I think it just comes faster I think the basic fee structures or are quite similar yes, that's right and I. Just think book Doubletree 10 double trees are full service hotels. So it's market specific but the absolute level of fees tends to be all day, but higher but generally speaking the return profile is very similar.
Perfect perfect the follow up or the second part is whether you think the $15 national minimum wage would impact.
Development economics for select service sales.
Crew hotels.
Which tend to be in smaller markets, where maybe the labor rate is much lower.
It could.
And you've been talking to lots of folks about this issue.
And broadly I think many including me are supportive over time that the minimum wage and needs to move up but as I said to a number of people and the administration time and place sort of how you do it and when you do it matters and so I think the likely outcome.
Is.
I don't know that it will end up and this first bill I do think that there I think that is probably not highly likely based on what I'm hearing possible, but not highly likely but it will it will not be an issue that goes away and I think that the.
The how and the.
And the win and then become important and so how being that first of all even and what's being proposed and now it's not all to $15. It staged and over basically five years and so I think that that creates a ramp that allows people to adjust and we're obviously working with our owners on creating even more efficiencies.
So it.
It's not like overnight and you go across the country to $15 by the way there are a whole bunch of markets and are already $15 and so they've been dealing with it I would also like to think that you know if people really spend the time figuring it out that not every market is the same that living and Poughkeepsie is not the same as living in New York City and.
And that.
These can be index and then when do you start to see.
Sort of move it up I think it is a big issue might my personal worry and concern is the hospitality industry has been more impacted from a jobs from one of you than any industry and the country.
And its the slowest and recovery in terms of bringing jobs back and.
And I don't think raising the minimum wage and no matter. How you look at the analysis is going to help I think it will slow the rehiring of people and the industry and so I you know I.
I am hopeful that and the and you know.
And that.
You know people will be rational rational thinking will will prevail and as a result, this will not be.
Major issue certainly and the short to intermediate term I think we should all assume that the minimum wage is going to be going up going up over time, and fact, because it needs to but again I think I think I am hopeful that it will be done and a staged way.
And there'll be other mechanisms built into the to the timing and the geographical approach that will make it.
Make it makes sense on all sides. So the short and long answer Bill. The short answer is I don't I don't think and the short to intermediate term there is any.
Meaningful impact.
As a result of it.
And Bill I'll, just add I mean that obviously covers the ground on the issue really well I'll just add as a as a quick plug for our products right and so our products on a relative basis. If you start with revenue premiums and then our more modern prototypical, particularly you referenced true that even though if minimum wage wage and benefits Costco.
Up that does make it more expensive for developers, but on a relative basis, our products and more efficient. So it should and should continue to give us an opportunity to differentiate ourselves from a product and the last point not to.
And hit it too hard as the work we're doing right now and every one of our brands, including through and Hampton and everything else is about taking making them higher margin businesses and taking creating.
Creating more labor efficiencies, particularly in the areas of housekeeping food and beverage and other and other areas. So.
And theyre going to when we get out of the crisis those businesses will be higher margin and require less labor than they did pre COVID-19. So that will also sort of factored for and my commentary, but I think that.
Hopefully the net of it is as it goes up it's done over a longer period of time.
And it is done and you know and Ah.
Sort of thoughtful way.
Thank you for your time Krishna.
The next question comes from Patrick <unk> with <unk> Securities. Please go ahead.
Hi, good morning, everyone.
Good morning, Patrick My question Good morning morning.
Curious as to your interest at the moment and tuck in brand acquisitions today versus sort of your historical normal.
<unk> building brands from scratch.
Specifically interest.
Perhaps my international.
Brands are international private brands. Thank you yeah. Thanks, Patrick.
Good question and one we certainly we get frequently I don't think my views changed at all I mean, I think I.
And I've been saying for 13 years since we bought nothing we've done and we.
We've gone from a family of nine brands to 18 brands. So we've doubled it and up and the time I've been here and we Havent bought one of them.
<unk> developed and every single one of them. So from my entire time here I have been saying never say never right and you've heard my speech if.
And if it passes all the right filters, we'd consider it but nothing has and so I think you know not necessarily the past is indicative of the future, but you know that sort of tells you.
Our predisposition and so I would say never say never but the filter is a very tight filtration system, which is we think we got the best brand portfolio and the business, we think that that can be proven.
And typically by the fact that every one of our brands as the market share leader.
Everyone that we've developed and we think as purpose built around exactly what customers want and we like that and so anything that we would look to acquire would have to sort of meet that profile like we don't want to go backwards because we don't have to we have pretty much every category covered if something's not covered.
And we could launch it I don't think Youll see us launch a whole lot of new brands and the short term.
But you know why why would we do that we have all of the segments generally cover do we want to cover we have the best brands why would we pick up something that wasn't.
Superb and the same way that we then have to be distracted trying to fix.
And that we paid a lot of money for which leads me to the next filter which is economics.
And you just simple math, we are developing these brands for nothing not to make it and so we have and infinite yield every time, we do it every time, we do it through where our home too and these things become Mega brands. They become billion multibillion dollar businesses over time, it's an infinite return because we've effectively invest just sweat.
Equities, so something but not much so when we look at buying stuff, we haven't found anything that.
And it was perfect that doesn't require a lot of elbow grease and and you're paying a lot of money for it. So we just now and again never say never but that's sort of how we think about it now your comment. Your question also implied like region sort of regional price, that's where maybe I hate to say it and have it become a headline because I think the likelihood is we're not.
Not going to do do that but.
There are sort of smaller regional brands and places, where maybe we want a stronger foothold that.
They don't show up a whole lot and the radar, but for what they are very very good and so yeah. We've looked at a bunch of those over time and we will continue to do that the net result has been while we've looked at a bunch of and we haven't done any and.
And again.
Again, I would say I wouldn't I would condition everybody to say, we like what we got we think we've got the.
No offense to our competitors and maybe we had the best setup for the future and the industry and the last thing we want to do is botch it by either bring and brands that.
Like my father used to say you hang with other dogs should get the fleet and you know we don't want to bring stuff, we don't want to bring stuff and that that.
Messes up the portfolio and we're intensely focused on good capital allocation and I was.
Those are my origins and business being a good capital allocator.
And so when you put it together I think.
Not not high likelihood, but never never impossible.
Okay. Thank you.
Okay.
The next question will come from Robin Farley with UBS. Please go ahead.
Great. Thank you actually have two half questions asked and surplus follow ups. One is just on the growth commentary and you talked about how much better the second half looks.
I've got to think that for 'twenty two there will be group events that have and at that point taken place and three years I've got to think Youre volume for 'twenty two would be better than 19 is it just too early to see that too.
Early I think when we get into the second half of this year that my own belief I should hardly say it but it's like I said to our team. The other day do not give away space and 2020 too cheap.
Because I think theres going to be gargantuan demand and as a result more pricing power than people think just because people are.
Related all sorts of needs that are going to get released and it takes time to plan, so what youre going to see and the second half of this year.
As I think the big uptick will be and the smurf business because those are smaller groups. They can have the planning.
<unk> is not as.
I'm consuming the lead times are the big stuff. It takes time, when Youre doing 1000 person or multi thousand person conventions, even if youre doing its hybrid it takes a lot of planning and so that's really almost at this point <unk> got to start to fall into next year. So yes, I think if all goes according to <unk>.
Land and the first half of this year with vaccinations and theirs.
A reality.
And that people feel like they can start to congregate again being intelligent about it but do it and a safeway I. Thank you and the second half of this year Youll see a bunch of demand.
And that will dump into next year on stuff that requires planning.
Great Super helpful. And then my other follow up with some other unit growth comments and I think your comment about next year were maybe better than what some had worried about maybe 'twenty. One is benefiting from some of the construction and 20 that had been delayed so I guess when you talked about four to five per cent for the next few years and the.
This year being at the higher end of that does that sound like.
Maybe 22 would be at the lower and we know that there is maybe going to be a little bit of an air pocket for new development that would have started and the last 12 months is that how we should kind of think about that yes.
I don't think it would be that low I think.
Definitely I mean, we had $5 one last year, we delivered a lot more than we thought. This is we look at this year. There is a lot of stuff and production. We think again, we have really good momentum on conversions, which is going to help us more this year than last it'll help again, even more so in 'twenty two and then there's just stuff that's moving through that.
Under that was under construction or was put under construction that's going to help us I think next year I mean, we.
And we still we put.
75000 rooms under construction last year and most of that is not going to deliver this year, it's going to it's going to deliver and index and as I said, we are ramping on conversion and so I.
And I do think that 2022 could be lower than 2021, but not not by the degree that you are suggesting I still think that ultimately our goal is to be sort of in that 4% to 5% range and all of those years.
Okay, great. Thanks very much.
Uh huh.
Next question will be from Richard Clarke with Bernstein. Please go ahead.
Thanks, Thanks for taking my questions just a couple of questions on your conversations with owners and I used to talk about.
Upsides on the take rate as you sort of rolled contract labor and just wondering as we go through this pandemic value able to Q2 and actually.
Push and push to sort of the percentage is up and also your day.
And some capex holidays.
How is it.
And they kind of begin that renovation process and when would you expect that to restart.
Both good questions as questions.
So on the first.
R R.
Published rates you would say if you average all of our brands is about five 6% and license fees were about 5% right now in terms of effective rate in terms of where people are and the cycle.
I you know, we're not going to anytime soon and be increasing those rates and in absolute sense, but by definition every time a contract turns it goes to the new rate and I think.
And I'd say anybody likes it but that's sort of a standard standard within the industry certainly what we've always done and we'll continue to do that so you'll see that sort of grind up about 10 15 basis points a year and then when we get to the other side of this depending on the economics and.
Ultimate market share and all those things obviously, we can look at what we do with our fee structures, but we're going to we're going to sort of keep we think that they are good where they are and we will keep our effective rates and keep grinding up as you have natural rollover on the Capex side is really important.
Delicate balance.
The obvious one which is you got to keep the portfolio. We have the market share leaders and every one of these categories part of that is obviously service a part of its product and part of that product is about having fresh product consistent high quality product and we're <unk>.
Very religious about it we have given a lot of relief.
Thankfully, we went into the crisis and a really good position because we have been unbelievably diligent and disciplined and our and our owner community over time is recognize that to get those premiums they have to keep their assets up and so we went into the crisis a year ago and a good place where we have the ability we think.
To give them a bit of grace for a period of time and not have.
A significant impact with our customer base, but as we get to the other side of this yes, we're going to have to get back to.
Having that kind of discipline, which is not just in our interest and our owners' interest if they want to continue to drive results I suspect.
That's going to be next year and not this year.
And the sense that while I think the second half, we're gonna be and a very different world. We got and we're gonna have to let folks get back on their feet and and I think given again the quality of on average of our brands and the upkeep of those.
The brands and the individual hotels going into this I think we can do that without it being harmful.
Wonderful thanks very much.
The next question will be from Smedes Rose with Citi. Please go ahead.
Hi, Thanks.
Hi.
I wanted to just follow up on you talked about some of the group bookings improving sequentially and I know, it's too early to talk about 'twenty two but on your patterns that you're seeing here is there anything just from a geographic perspective, and the U S. That's showing up so far in terms of maybe shifting away from.
Higher costs cities that have already been underperforming from a revpar perspective, yes.
Yes.
And the geography is exactly what I think youre, implying and the question and what you would think.
Right now is less and the primary markets and more and the secondary and tertiary just because of.
And what's been going on and a lot of the big cities and the greater density of population and reality is as I said a lot of the uptick that we're seeing into the second half of the year Smurf business and the nature of that business lends itself more and more to those geographies.
And I fully expect as I as I said, when we sort of get a bit of the all clear and people start to think about group and a very different way.
And I hope that in the second half of the year Youll start to see those those patterns normalize, but given that it is more and the smurf segment, if by definition ends up being more and.
Disproportionately outside of the big urban centers as compared to normal demand patterns at the moment.
Okay. Thank you and then just very quick follow up I'm, sorry, if I missed this but what was the impairment charge that you took in the quarter and add back and just sort of what that was related to.
Yes, most mostly in <unk>.
Almost entirely and the ownership segment means we this was announced and the pre announce and for the bond deal as well and what we thought it was going to be both mostly goodwill related to the to the ownership segment that just having to do with the duration of the crisis and the Recoverability of those of those assets and I'll bet you all con cash.
Thank you.
Sure.
Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Christopher setup for any closing remarks.
Again, thank you guys for joining us today.
<unk> 2020 will go and the record books for sure not not the greatest year for our company and our 101 year history or the industry certainly, but as I said in my prepared comments. We are proud of what we were able to accomplish we think the businesses and a terrific position. We are certainly of the mind and hopeful as I've described.
And in many ways that as we get to spring summer and certainly in the second half of the year, we're going to be and a very different place and we will look forward. After the first quarter, which will get us to the early spring to hopefully be able to.
Comment on on those positive trends, thanks, again, and everybody stay well.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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